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First post in a long time from an old FW member. Sorry if this has already been covered and I missed it.

I was wondering what to do about my unused $100k HELOC whose draw period will be up in a year or so. The rate is Prime-1% (edit: with a floor of 2.5%), or 2.5% currently, which is pretty good.

One idea is to draw all of the HELOC line just before the draw period expires, at 2.5%, and use it to pay down my first mortgage at 3.625%. The HELOC automatically converts to a 15 year amortization when the draw period expires, using the prime rate in effect at the time. I assume there are no closing costs, since I already paid them at HELOC closing. So in effect, I get a free/no closing cost mortgage refi. I'd get a new, additional mortgage for $100k @ 2.5%, and I can pay down the first mortgage by $100k and pocket the difference in interest rates.

This assumes the HELOC rate will stay below the mortgage rate, but I can verify that next year before actually committing to this.


Your thoughts on this strategy? And specifically, has anyone had a HELOC whose draw period expired? Were there any costs associated with converting the balance to a fixed repayment schedule?

Thanks in advance for any input.

DWJoe

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DWJoe , I'm in the same boat with a Citizens HELOC . Have you considered a refi to a fixed rate mortgage ?... (more)

ultrawildcard (Mar. 15, 2013 @ 7:43a) |

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DWJoe , I'm in the same boat with a Citizens HELOC . Have you considered a refi to a fixed rate mortgage ?... (more)

ultrawildcard (Mar. 15, 2013 @ 7:45a) |

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DWJoe , I'm in the same boat with a Citizens HELOC . Have you considered a refi to a fixed rate mortgage ?... (more)

ultrawildcard (Mar. 15, 2013 @ 7:45a) |

Summary by DWJoe:
-My HELOC draw period will expire in a year or so. APR is 2.5% currently and tied to prime rate.
-When draw period expires, HELOC must be repaid on a 15-year amortization, but APR continues to float. (credit DaveHanson)
-Fixed rate repayment option exists, but at Prime+2.5%.
-If draw from the HELOC to pay off a portion of my mortgage, my mortgage payment does not automatically go down. (credit RidicuRuss)

Bottom Line:
-My expiring HELOC gets me a free no-closing cost adjustable rate mortgage that amortizes on a 15 year basis.
-Not the free lunch I was hoping for, but thanks to community input, I have a better idea how much the lunch costs.
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Just be careful. Paying down the mortgage sounds all well and good, until you're holding $100,000 in cash.

Nevertheless, a heloc, is just more mortgage debt... so, if you think about it, it cannot actually be used to pay down anything.

So, if you're going to use it... use it for arbitrage, if you can come up with a way to earn more than 2.5% on that amount.

You'll want to read the terms found in your heloc paperwork, to find out your specific draw and expiration clauses and any potential further costs. Naturally, every heloc - from different banks or even different issuance times - is going to have unique terms.

Hi DwJoe! Long time no see!

Yes I too have a heloc nearing the end if its draw period . It will convert to an amortizing loan with no closing costs. No need to wait to draw the money , do it now.

The only risk is if your rate is variable during the amortized term. Mine converts to a fixed rate loan so there's no uncertainty

I don't know about conversion costs (or whether conversion to a fixed rate means a higher interest rate), and it's a shame that either you didn't or weren't able to take better advantage of that HELOC during its draw period, but the Prime Rate has been at 3.25% since 12/16/2008, making your HELOC rate 2.25%, not 2.5%. This assumes there's no floor to the HELOC rate or that the floor is 2.25% or below.

glxpass said:   it's a shame that either you didn't or weren't able to take better advantage of that HELOC during its draw period
Sometimes it's better to be safe than sorry. OP is simply being prudent to the comfort level for their own family's outlook. I don't see the choice to refrain from getting further into debt - for one's own situation - as somehow, a missed opportunity, over a few negligible percent of potential interest arbitrage, when it's just as easy to get in over one's head.

tlvx said:   glxpass said:   it's a shame that either you didn't or weren't able to take better advantage of that HELOC during its draw period
Sometimes it's better to be safe than sorry. OP is simply being prudent to the comfort level for their own family's outlook. I don't see the choice to refrain from getting further into debt - for one's own situation - as somehow, a missed opportunity, over a few negligible percent of potential interest arbitrage, when it's just as easy to get in over one's head.

Taking a $100K advance or whatever from the HELOC and placing it into a FDIC-insured deposit account at a higher interest rate doesn't increase net debt and allows one to take advantage of the interest rate differential. This could have earned OP anywhere from $2K or more in net interest per year. That's hardly "negligible."

As to whether this would be the optimal strategy for OP, taking into account other factors, only OP can say. Regardless, it's incorrect for you to say that taking an advance against one's HELOC necessarily means "getting further into debt", and you grossly underestimate the effects of interest rate arbitrage during at least some of the draw period of OP's HELOC. This is only one example of using low interest rate debt in a profitable fashion. To OP's credit (pun unintended), he's now thinking of other strategies to do just that.

Based on your posts in this and other threads, please learn more about these matters before making gross generalizations and statements that are simply wrong.

A good example of what I'm referring to:

http://www.fatwallet.com/forums/finance/1237542/m17355074/#m1735...

My initial reading of the HELOC terms didn't uncover any fees associated with the conversion to a 15 year loan amortization. I'll dig further to see if I can find any gotchas.

(edit: APR is Prime-1% with a floor of 2.5%)

My comfort level on HELOC debt is to use it as
A) home improvement financing
B) emergency fund
C) guaranteed arbitrage.
I've used it on and off for A and fortunately haven't needed it for B. I haven't found a convenient way to arbitrage until now.

The only guaranteed rate I've found that is higher than the HELOC rate, is my mortgage debt. But I don't feel comfortable with the risk of arbitraging short term variable rates vs long term fixed rates. What's different now is, that the HELOC variable rate will auto-convert to a fixed rate, if I read the terms correctly. Thus creating a no-lose arbitrage scenario with my 1st mortgage.

Here's my proposed sequence of events:
Let X be the date that the draw period expires and the HELOC converts to a fixed 15 year loan

X-30 days: verify that HELOC rate / prime rate is still attractive
X-3 days: reverify HELOC rate and draw $100k, but hold the cash
X = HELOC converts to fixed 15 year
X+3: reverify HELOC fixed 15 year rate. If rate is as expected and/or attractive, pay down 1st mortgage, else pay off the now-fixed rate HELOC.

The only problem that I see would be that you would have to pay both the payment on the HELOC plus the original mortgage payment (which would not reduce with the paydown). Also the minimum payment on the HELOC may not be calculated the same way a mortgage payment is. ie, some HELCOs require like 2% of the balance as a payment. This may not be the case once the HELOC converts, but you should check.

glxpass is giving you good advice. I did exactly what you are thinking. I maxed out my HELOC and paid off my 1st mortgage which dropped my rate by 2%. The rate is floating at prime and I feel relaxed with where rates are and where I think they are headed. (flat). My only regret is not doing it sooner. The idea that you are going deeper into debt is wrong. You are just changing the structure of your debt and getting a better rate in the process.

RidicuRuss said:   The only problem that I see would be that you would have to pay both the payment on the HELOC plus the original mortgage payment (which would not reduce with the paydown). Also the minimum payment on the HELOC may not be calculated the same way a mortgage payment is. ie, some HELCOs require like 2% of the balance as a payment. This may not be the case once the HELOC converts, but you should check.

These are good points, but OP should check with his first mortgage lender to see if they will re-amortize his first mortgage payment. (Or are you paying it off completely OP?) Many will do this for a $100k paydown. Then again, OP may not even desire to do so, especially if there is a small balance left that he was planning on paying quickly. Regarding the minimum payment, most HELOCs will convert to a fully amortizing loan after the draw period, not continue to require whatever the minimum payment was during the draw period.

SUCKISSTAPLES said:   Hi DwJoe! Long time no see!No doubt !

So I called my Chase HELOC, since I thought it was a good idea to find out when the draw period expires as I didn't know. I have another 4 years they told me. But then they said they had a special offer; I can borrow up to $25,000 on my HELOC for 0% and no fees for 6 months. I could put it in my savings/checking account and get a spread of 1-1.50%. To me it seems to good to be true, has anyone else come across this? Am I missing something?

I'd echo GLX's comments - I paid off my primary mortgage with 0% debt and used a HELOC as a backstop.

RidicuRuss points out the cash flow implication - your monthly mortgage payment won't go down; however, some lenders offer a recast where they reamortize your remaining balance over the remaining duration, for a small fee. I did this many years ago for a one-time $450 fee, FYI. Not sure what options are available today.

In general, if you can confirm the rate is fixed and there are no costs for the switch to amortizing, I'd be all over this.

stamfordmike said:   So I called my Chase HELOC, since I thought it was a good idea to find out when the draw period expires as I didn't know. I have another 4 years they told me. But then they said they had a special offer; I can borrow up to $25,000 on my HELOC for 0% and no fees for 6 months. I could put it in my savings/checking account and get a spread of 1-1.50%. To me it seems to good to be true, has anyone else come across this? Am I missing something?
You know what they say, "When it seems too good to be true, it usually is." But actually, in these cases, it's just about your personal wherewithal, for not getting sidetracked from your strategy. The bank knows that a certain percentage of customers will get all too comfortable, once in possession of that kind of money. That's why they offer low to zero percent introductory rates, to entice borrowers to come up with reasons to use the funds... which, with the earnest help of a significant other... it often works out just as intended - for the bank - enough for them to make their money in the end.

If you can stick to the plan, than go for it.

I've been a huge advocate of HELOCs here and elsewhere for the past decade. The OP's scenario offers one of many kinds of arguments in their favor. (And welcome back Joe!)

However, having said that, SIS's situation--where the repayment period of the HELOC loan is at fixed rates--is *highly* unusual. For 99+% of us, that loan will be variable.

That need not be huge cause for alarm. The Fed has essentially committed itself to a "zero interest rate policy" (ZIRP) until 2015 or later. That means those of us with Prime - 1% helocs (for example) will enjoy a 2.25% rate for years--quite possibly until we extinguish the loan by paying it off (either because we sold the property or didn't have a use for the excess funds.

I've been taking large advances on my $400K HELOC for many years and am nearing the end of my draw period as well. I've been very successful with the strategy and made a lot of money with the HELOC over the years. I mainly bought 5 year CDs starting in 2005 in the 5.5% to 6.5% range. It was a neat way to make income off of my house without moving out and renting it!

Even though I'm near the end of the draw, it doesn't appear there are any more 2.5%+ FDIC/NCUA insured investments. All the good deals are long gone, and while most will agree the Fed will be flat for the next 2-3 years, going out too much past that with variable HELOC loans seems risky. Even 7 year+ CD's aren't paying 2.5%. Buying equities, even high dividend paying ones wouldn't be smart with HELOC money. State munis aren't terrible, but like everything else that pays decent interest they are priced too high driving the yield down.

So sadly for me, my HELOC potential is rotting thanks to the Fed. The last CD I did was a Penfed 3 year, and I've now given up.

For the OP, the main point and it was already brought up was the payment on his 1st will have to be made, along with the new P+I payment on the HELOC. This might wreck a monthly budget. For OP, I think the strategy would only be safe if you can retire the 1st mortgage.

I just closed on a new HELOC, so the documents were close at hand. A few cautions:

- Confirm that your lender is actually going to close your draw period and convert the outstanding balance to an amortizing loan. My HELOC says that "we may renew or extend the period during which you may obtain credit advances..."

- Confirm that the rate you are paying now will be the same once you convert to an amortizing repayment schedule. Mine, for example, will remain at the same rate +/- the margin as long as I continue to let it float. However, if I choose a rate lock, the fixed rate determination is different. For example, if I were to convert a balance today to a 20 year lock, the rate would go from 3.25% (floating) to 5.11% (fixed).

Read your docs, folks.

DaveHanson said:   However, having said that, SIS's situation--where the repayment period of the HELOC loan is at fixed rates--is *highly* unusual. For 99+% of us, that loan will be variable.I think most HELOC's today have a conversion feature that will allow you to fix the rate/term on a portion of the balance during the draw period, or on the outstanding balance at the expiration of the draw period. The rate will typically be higher, of course, but characterizing fixed rate repayment terms as "highly unusual" is a little misleading.

You'd want to figure out what your payment would be on the maxed out heloc, in conjunction with your left out mortgage payment. and make sure it doesn't mess up your cash flow.

$100k at 2.5% amortizing to 15 years from now is about $666 a month (heh), but the bank would be the more definitive source for what your paymen twould be.

dcwilbur, I'm not sure how many HELOCs today have an option to convert to fixed rates. Historically, most have not. If yours does, it's certainly worth exploring that option. In any case, if you do have that option, and you exercise it, you're not dealing with a conventional HELOC any more.

For a HELOC to convert to a fixed rate loan at the same rates does indeed remain "highly unusual." This is important to stress because many Bank/CU reps might not even be aware of this, yet it can come as a shock to borrowers if (a) the index their rate is tied to rises while they're still paying back the loan, and (b) they haven't prepared for it.

Happily, most shouldn't see their indexes rise anytime soon. That allows time to refinance, sell the house, take out a new HELOC, et cetera...which makes the option the OP is contemplating more viable than it might be otherwise.

Thanks for all the input, and for the welcome from fellow FW'ers from back in the day. It's great to see that FW Finance is still a great source of advice and ideas.

The HELOC documents are confusing, but I read more closely and it looks like the post-draw period interest rate is indeed variable, consistent with the common case DaveHanson highlights above. When the loan converts to a 15-year repayment schedule at the end of the draw period, the interest rate remains pegged to Prime - 0.75%. Current rates then determine how much of your payment goes to principal vs interest. There is a fixed rate repayment option, but at Prime + 2.5%. So, no free lunch, unfortunately.

(edit: APR is Prime -1% with a floor of 2.5%)

DWJoe said:   There is a fixed rate repayment option, but at Prime + 2.5%. So, no free lunch, unfortunately.Exactly.

The ability to convert an outstanding balance to a fixed rate repayment schedule, either during the draw period or upon expiration of the draw period *IS* a fairly standard HELOC feature. For example, if I have a $100k line of credit with a $20k balance, say, at Prime, I can convert the $20k to a fixed rate loan at 5% or so with a ten year amortization. I will still retain the floating rate HELOC privileges on the remaining $80k.

Again, fairly standard terms.

DaveHanson said:   dcwilbur, I'm not sure how many HELOCs today have an option to convert to fixed rates. Historically, most have not. If yours does, it's certainly worth exploring that option. In any case, if you do have that option, and you exercise it, you're not dealing with a conventional HELOC any more.Dave, even though the fixed rate component now has the characteristics more like a traditional home equity LOAN, it is still very much a conventional HELOC. In the example I gave above, as the $20k balance on the fixed rate portion is paid down, the available balance on the line of credit will be restored. That is, once the $20k is paid off, the full line of credit of $100k will still be available at the floating rate.

DWJoe, glad you were able to get this key question answered without much hassle. Can you exercise the fixed rate option during both the draw and the repayment period?

dcwilbur, it sounds like your HELOC has an option like DCU's and several others ("locking" in a portion of the HELOC to a fixed rate schedule, sometimes with a modest fee of, e.g., $50 per lock). These can be nice features, especially when the gap between the fixed rate repayment and the variable rate isn't that high (as in SIS's special case.)

I'm not sure what turns on it, but your terms are not "fairly standard." The vast majority of HELOCs currenly being serviced to not have them. Now it is true that more newly originated HELOCs have that option, as it can make the product more attractive to a lender's customers without increasing their expenses if their pricing is right. (BTW, anyone happen to know who originated this "lock part at fixed" feature? I don't.)

WRT OP's situation, my main point above was that unless you have specific reason to believe otherwise, a HELOC in repayment will be a variable loan.

DWJoe said:   The HELOC documents are confusing, but I read more closely and it looks like the post-draw period interest rate is indeed variable, consistent with the common case DaveHanson highlights above. When the loan converts to a 15-year repayment schedule at the end of the draw period, the interest rate remains pegged to Prime - 0.75%. Current rates then determine how much of your payment goes to principal vs interest. There is a fixed rate repayment option, but at Prime + 2.5%. So, no free lunch, unfortunately.
Is there a limit to how much the rate can adjust upward over, say, a year?

If it was limited to, say, 1%, then you'd know that even after a year it would still be just 3.5%, which is still lower than your mortgage. You could use this to lock a *portion* of your mortgage balance, but not more than you'd be uncomfortable having at a higher interest rate after a couple of years if rates went up in that timeframe.

DaveHanson said:   DWJoe, glad you were able to get this key question answered without much hassle. Can you exercise the fixed rate option during both the draw and the repayment period?
Dave, no, the fixed rate option on my HELOC only applies at the end of the draw period.

markkundinger said:   Is there a limit to how much the rate can adjust upward over, say, a year?
No, on this HELOC, the APR resets every month, subject only to a minimum of 2.5% and a maximum of 18%.

Interesting Joe, who issued your HELOC?

Variable apr Helocs usually adjusts as fast as the index they are based on . No annual caps like adjustable mortgages - they can go up 5-15% in a year if the index moved that much

Dave, this Prime-1% HELOC is from Citizens Bank and was issued back in '04. They've been generally pleasant and easy to deal with. Unfortunately their current HELOC rates aren't nearly as good.

Sounds similar to one of mine, DWJoe. Third Federal bought out a deepgreenbank HELOC from late 2002, and it's just about to conclude its 10-year draw period at the lovely prime -1% rate (I miss those).

DaveHanson said:   dcwilbur, it sounds like your HELOC has an option like DCU's and several others ("locking" in a portion of the HELOC to a fixed rate schedule, sometimes with a modest fee of, e.g., $50 per lock). These can be nice features, especially when the gap between the fixed rate repayment and the variable rate isn't that high (as in SIS's special case.)

I'm not sure what turns on it, but your terms are not "fairly standard." The vast majority of HELOCs currenly being serviced to not have them. Now it is true that more newly originated HELOCs have that option, as it can make the product more attractive to a lender's customers without increasing their expenses if their pricing is right. (BTW, anyone happen to know who originated this "lock part at fixed" feature? I don't.)
Dave, I know you fancy yourself the HELOC expert around here, but fixed rate conversion options have been around a long time. I've had them on various lines that I've had going back well over ten years. Looking at today's offerings, Bofa, Citi, Wells, etc., all the major lenders offer a conversion option. I just opened a new line myself with a small local bank, and all the lenders I contacted/researched along the way had the feature.

As a matter of fact, you and SIS discussed just such a product in THIS thread almost eleven years ago!

Newbie here. I'm little confused about what happens when draw period ends. As I understand it, the balance of the HELOC is converted into an amortized loan to be paid over a 20 year period (in my case). The remaining line of credit would not be available during the repayment period. dcwilbur stated that he could retain the floating rate HELOC privileges on the remaining credit line. How is this possible if he cannot draw during repayment period?

maxa2238 said:   Newbie here. I'm little confused about what happens when draw period ends. As I understand it, the balance of the HELOC is converted into an amortized loan to be paid over a 20 year period (in my case). The remaining line of credit would not be available during the repayment period. dcwilbur stated that he could retain the floating rate HELOC privileges on the remaining credit line. How is this possible if he cannot draw during repayment period?There are a couple of things going on here...

First, don't assume that your draw period is expiring. It is not uncommon for HELOC lenders to extend draw periods. Contact your lender to find out what they are going to do in your case.

Next, if the draw period is actually expiring, then yes, your existing balance will typically convert to an amortizing loan according to the terms of your agreement. You will not have access at that point to any unused portion of your credit line.

I described continued access to the unused portion of a HELOC after conversion of an outstanding balance to a fixed rate, fixed term amortizing loan during the draw period. Many HELOC lenders offer such conversion options.

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DWJoe , I'm in the same boat with a Citizens HELOC . Have you considered a refi to a fixed rate mortgage ? Do you think refinancing at 3.75% now would make sense ? This question is the reason that I searched out this discussion

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DWJoe , I'm in the same boat with a Citizens HELOC . Have you considered a refi to a fixed rate mortgage ? Do you think refinancing at 3.75% now would make sense ? This question is the reason that I searched out this discussion

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DWJoe , I'm in the same boat with a Citizens HELOC . Have you considered a refi to a fixed rate mortgage ? Do you think refinancing at 3.75% now would make sense ? This question is the reason that I searched out this discussion



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