Filed under: Home Equity Loan
Question: One thing that came to my mind is that there seems to be a lot of cultural pressure going on, in these middle-class families who are getting squeezed and going bankrupt. They may have a lot of “fixed expenses”, but the amount of those fixed expenses depends on choices – like the choice to have kids at all, or to have more than one; or the choice to buy an expensive house in a good school district rather than one in a less expensive area (or to rent); or to have more than one car – now that’s a choice that’s often overlooked as a choice; it may not be convenient to have two working people and only one car, but it can be done (I’ve done it). I think in a lot of these areas, there’s an assumed “of course you have to do X”… but that can get people into a lot of trouble if they don’t examine it in their situation. I don’t think “I want to have a(nother) child” is somehow a magical thing that excuses not being able to afford one, for instance.
Answer: I agree with you 100%. Many middle-class people these days seem to assume that a large house in a good school district and two newish cars are absolute necessities, as if life isn’t worth living without them. And they cheerfully choose large credit card debt and no savings in order to afford these “basics” along with all the other “necessities” like two cell-phones, cable TV, etc.
At times it seems to me as if the majority of a whole middle-class generation simply does not have any financial common sense. These people make decisions without using any critical thought/analysis about what the long term consequences of their choices will be. There is no plan, no strategy, no perspective. I know I used to be that way, and it has taken years of thought and research to open my own eyes to how I was shooting myself in the foot with my spending choices.
What I think is curious is that in our culture many of the middle class receive very little mentoring or education about handling personal finance. My parents never talked much about their financial philosophy to me. I don’t remember much, if anything, about personal finance in high school. I took a decent class in college, but it was an elective, and it didn’t really go much beyond explaining how the stock market and bonds work. The mainstream financial advice industry is pretty useless about fundamentals. There are lots of articles on the technicalities of mutual funds, but very little on how to structure your life so you have enough to put into a mutual fund. The media also has an alarming rate of giving bad financial advice, like how you can use a home equity loan to afford more stuff, or using a home equity loan to pay off your credit cards.
I think part of the required high school curriculum should be a real world skills class that runs for at least two years. The class would cover everything from financing a college education, shopping for a car, renting an apartment, opening and balancing a checking account, investing, hiring a contractor to do work, credit cards, starting your own business, etc. The final semester would be a computer simulation where you have income, make purchasing and saving decisions, buy a home and a car, get a job or start a business, etc, and then your final grade depends on your net worth at the end. A class like this would make a bigger difference in peoples lives than geometry or calculus.
January 1, 1970
Question: Did I not say “relying on an occasional home equity loan for emergencies”?
You surely did. And it’s still very bad advice. Of all times not to jeopardize your house with a home equity loan (and it’s always a risk), an *emergency*, which assumes you don’t have the money to pay it otherwise, seems the most risky.
So where do you suggest saving for/getting emergency funds? Saving in
savings accounts and CDs where returns are typically less than 1% after taxes, almost guaranteeing that you lose (particularly vs. inflation). If that money is used to pay down mortgage,
you can have the same (actually much greater due to greater returns) rainy day fund available by effectively making (saving) 4+% if you itemize and 6+% if you use a standard deduction. As I
pointed out, the home equity should only be used for rare emergencies, but I’ll add one more
use – to finance a car – provided you itemize. A deductible home equity loan is usually much
cheaper than a typical car
Answer: So where do *you* suggest saving? I may have my savings in low-interest CDs, money market funds, and savings bonds, but at least their value is still higher than when I bought them, unlike the money I invested in stock mutual funds, which continue to hemorrhage money (and this includes my IRAs–I’ll never have to worry about taxes on the gain because there’ll never be a gain). Still beats leaving it under the mattress. You save for, and get, emergency funds by putting money away regularly into assets which can be easily liquefied. I don’t know how a 3-5% APR (which is what I’m getting on my various instruments) gets knocked down to less than 1% by taxes. That’s a pretty hefty tax rate–60-80%. You’re going to borrow money from your house to pay your mortgage? So instead of cashing in a low-interest CD and losing that 3-5% APR to pay your 8% mortgage, you’re going to add on a 9% loan to pay that mortgage, and because you get to deduct 15 or 28% of the interest, you think you’re making money.
If you finance your car using a conventional loan, the worst that can happen when you default is that they take the car. If you finance your car using your house as collateral, you might keep the car, but lose the house. And since you don’t believe in saving for emergencies, you won’t have any money to protect the house when repo-man comes to the door. Gee, sounds like a plan to me.
January 1, 1970
Question: You do not necessarily have to pay PMI if you put less than 20% down. > We have an 80/15/5 (called a combination loan) loan on our townhome. > One loan at 80%, one loan at 15% and 5% down. Check with multiple > lenders as some lenders do not carry this type of loan.
> http://www.homebanc.com/LoanPrograms/Combination.as
p>Such loans weren’t available when I bought my place, so I know nothing about >them.
>Out of curiosity – what’s the interest rate on the 80% and on the 15%? What >would have been the rate if you had taken out one 95% loan? How much would >the PMI have been? Has there been enough appreciation on your place that >you could now cancel the PMI if you had it?
Answer: Here is a good example…
texas-loan.com/pmi.html {unfortunately I can’t create an HTML link to their site that works so copy and paste the link above into your browser…also the right column appears to be misaligned, but it conveys the point}
The 80% loan is at the same percentage as the 95% loan. The 2nd loan is at a higher rate, about 2-3 percentage points higher, but the interest paid on Ln2 is tax deductible, while PMI is not. I think your credit has to be better to qualify for this combo loan over a 95/5 loan with PMI, as both lenders have to assume additional risk in the absence of PMI. But for people who want to buy a house, have good credit, and a good income source…the combination loan is a better alternative.
Be careful. Some second loans on an 80-15-5 program have pre-payment penalties. But if you get a 2nd loan with no pre-payment penalties, you can attack that loan with extra payments towards principle and pay off the loan early (assuming that is the worst debt you have).
If the place appreciates effectively, we would be able to refinance or borrow against the appreciated amount (I don’t really know a lot about this area…we are 1 year into the loan). In order to cancel PMI, we would have to have 20% of the home paid off.
To answer your last question, I am not sure how much PMI would have been. I think there are several factors that go into MI, but an example would be ((mortgage amount) x .0078)/12 = monthly MI.
The .0078 would be the variable depending on what type of loans you had.
January 1, 1970
Question: My parents provided for me with my >education. I was really >concerned that my mom would have to go to a nursing home if she got to ever >leave the hospital. I didn’t know how in the world we would pay for that. >And believe me, my mother enjoyed buying things. 2 weeks before she died, >she had an aide wheel her down to the gift shop at the hospital and when I >went to see her later that day, she told me to go down there and pay them. >She bought $30 worth of knick-knacks. Thank god she never saw the gift shop >at the large hospital where she ended up. Mostly she bought crap at >Wal-Mart.
Answer: That would have been relatively simple. You could have put your mother in a nice nursing home and paid for it out of her assets which would have included selling the house or any liquid accounts. When the money was gone, Medicaid would kick in. You would not have been responsible. I did exactly that for my mother. But, she dies before her money ran out.Your mother sounds like she was a smart woman and a nice one. And, it appears she died happy by doing was she liked to do. I think that’s great and no doubt she was smiling when the left you.
January 1, 1970
Question: Ok, I am finally out of school and about to start working. I have been promising myself for the past 10 years that when I did begin to make money that I would NOT go insane and that I would try to save a decent amount of money and maintain my current standard of living. I havent many complaints about my current lifestyle, no need for new car, expensive clothes, jewlery ,dinners, etc. How much is reasonable to pay myself? I know that if I skim it off the top and funnel it away I wont miss it because Im not going to suffer any DROP in standards here, so i want to begin this as soon as I am established, before i get into the habit of spending money for no good reason. (my sisters income almost doubled in a year and she seems to be just as broke now as she was last year).
Is there a suggested percentage, formula or whatever? Should i put it in a savings account or maybe savings and then once i build a certain amount start rolling it into other higher yield types of savings? Thanks
Answer: I suggest 10% be saved for life. First, maximize a Roth IRA and any available company 401K or similar plan in diversified stock funds (over time it should pay off better than any other investment approach and looking back, these times are probably the best opportunity to invest for 10-30 years from now). The rest of that 10% should go into an after tax stock fund from which you can draw upon for emergencies (something like the Fidelity 2030 Freedom stock fund is rather conservative approach for someone who just wants a balance of stocks). That 10% should strictly be used for retirement or emergencies and should be saved every year.
Next, you should work to pay off all non deductible debt. It’s unlikely that you can invest and get a conservative return that will exceed typical debt interest. Then stay out of debt – especially all credit card debt.
Finally, you should save whatever you feel comfortable saving towards an eventual down payment on a home (assuming you don’t currently have one and assuming a home fits your life style – they are not for everyone) – perhaps another 10-20%. It’s generally agreed that 25% and perhaps no more than 30% of your income should be going for housing. If you are renting at a lower percentage, bank at least the difference (30% less the rent/utilities) in a stock fund for the long term or perhaps CDs for the short term (1-2 year intended usage – emergencies, purchase of a car, etc.).
Then spend some on yourself. Life is too short just to save everything.
January 1, 1970
Question: Try margin buying in todays market and I suspect you’ll be disappointed. And, I can not fathom where margin buying would be safer than borrowing money on one’s home. So believe margin borrowing is safer than borrowing against one’s home (in most cases). How? Why
Answer: Given the context – a person who chooses not to keep a cash/cash-equivalent emergency fund, who then proceeds to have an emergency — absolutely, I think margin borrowing is better than using home equity. Margin borrowing implies that the person has assets in a brokerage account which could be liquidated easily anyway, but he chooses to leave those assets as they are (for any of a variety of reasons, though the most likely is avoidance of potentially huge cap-gains taxes).
The downside risk of a short-term margin loan is that the equities tank, a margin call goes through, his stocks are liquidated and that’s the end of the story.
The downside risk of borrowing against his house is he loses his house.
January 1, 1970
Question: >I was wondering if someone could tell me if this scenario is possible >:
>I paid $105K for my house in Oct.’01. Compared to similiar models, >it’s currently going for around $130K. I am looking to refinace my >mortgage now. Here’s the part I would like to know if is possible : >If my house appraises for $25K more than I paid for it after I >refinance – can I take out a home equity loan on that $25K?
Answer: I paid $105K for my house in Oct.’01. Compared to similiar models, it’s currently going for around $130K. I am looking to refinace my mortgage now. Here’s the part I would like to know if is possible : If my house appraises for $25K more than I paid for it after I refinance – can I take out a home equity loan on that $25K?
Thanks ahead of time.
January 1, 1970
Question: I’ve had a credit card with CitiBank for 2 or 3 years now. It’s got a variable interest rate – prime plus 5.4 percent if my balance is above $2,500 (which it is right now), and prime plus 7.4 percent if it’s below $2,500 (which it will be next month 
. Those work out to 13.9 and 15.9 percent, respectively.
I also just got a splat-inum card from FUSA that’s at 4.9% until June – a short enough time period that it’s essentially useless. After that, it’ll be at 12.99% (unless they screw me over like they did other people in here. 
Yesterday, I got a personal loan offer from CitiBank proper – “up to $7,500″ at a 12.9% rate. Given that it’s a loan, it’s a different type of credit-report entry than a credit card (I don’t want to have a lot of credit-card entries on my report) and if I could qualify for even half of that maximum, it’d basically let me “refinance” my credit card at a lower, fixed rate.
It seems like a good idea, at least on the surface. The only downsides are the uncertainty about how much of a loan – if any – I qualify for, and how long it would take to process. Naturally, if they send me $2,500 at a point when my CC balance is $2,200 or whatever, they’re getting some money back *real* fast!
Theoretically, any loan at all at 12.9% would be good, as it’d let me drop part of my credit card debt to that lower rate. I’m just curious whether it’s good in practice.
Any thoughts on these loans? Anyone else done this?
Answer: Hi, Dan! I’ve done this several times over the years. It’s one of the ways many financial advisors suggest to get out of higher interest so you can pay off debt faster.
Just a few years ago, before all these “limited time low-interest” credit card offers started popping up all over the place, shopping for a loan with interest as low as you could find, to pay off credit cards (which always had way higher interest than personal loans, IME) was pretty much the *standard* “smart move” people used.
Then, of course, you freeze the card in a block of ice till the loan’s paid off, or cut it up, so you don’t start running it up again.
But I’d shop around for a *better* loan interest-rate than that–there may be one that’s lower available to you. Phone other places. If you qualify for membership in a credit union, sometimes they offer the best personal-loan deals.
I wouldn’t just jump at one offer because they happened to send me something. I look at those mail offers as *advertising*, and I never just run out and buy something from a place just because I’ve seen an ad from them; I figure they’re paying for that advertising–maybe someone else who isn’t blowing so much on advertising can offer a better deal! Y’know, kinda like house-brand versus nationally-advertised brand when it comes to groceries!!
I’ve never had any trouble switching existing cc debt to a loan–but the bank making the loan usually wants to make sure the money *will* go onto the existing cc debt, and may insist on the payment (loan proceeds) being paid by them directly to the cc company. Also, if it looks like you’ve been “abusing” credit or really over-stretching yourself on credit, some places want you to hand over the credit card so you “can’t” do it again (tho I can’t figure how they think you couldn’t just go out and apply for another card!!)
If you’ve otherwise been responsible about money, I think the bank usually is willing to lend you the full balance that’s showing as debt on the credit card. *Don’t* try to borrow more than that just because you get a chance at lower interest.
Shouldn’t apply to anyone who hangs out here, but–*don’t* say something like “I want to pay off a credit card and get some extra money so I can buy (fill in anything that’s not a necessity of life here).
My friendly loan/mortgage officer at my bank has told me some of the crazy stories about loans that weren’t granted because in the same breath the person was saying “I really, really want to deal with my debt and be responsible” and then “My wife and I have *always* wanted to go to Bermuda and there’s this good deal on right now…”.
Anyway, Dan, I’d say check it out–not just the offer you’ve received, but the possibilities. Good luck!
January 1, 1970
Question: In the US, if you own your own home or have a mortgage, you may be able >to get a home-equity loan and borrow against your home. The interest on >home-equity loans is tax-deductible, because it’s essentially a >mortgage.
Answer: Interest on a home-equity loan is usually, but not always, tax deductible as mortgage interest. In general, if your first mortgage was under $500,000 and your home equity loan is under $100,000, and the total of your remaining first mortgage and your home equity loan do not exceed the original amount of indebtedness, then the interest is probably deductible. However, there are very specific guidelines that you should read before you count on the tax savings, particularly if you made a large down payment or your home has increased in value significantly since you bought it.
If you own a boat that has a bunk and a chemical toilet, you may also be able to deduct any interest on the boat by claiming it as a second home.
The tax laws just get wierder every year.
January 1, 1970
Question: (I’m working on the house before work, and week ends. If I was to wait a couple years I could have paid cash, but not I’m forced to beg for a loan. If I had bough the new truck I was looking at, they would have loaned me $23,000 and had me out the door in an hour. Why is it so hard to get money for a home?
Because if you don’t make the loan payments on a truck, once they’ve repossessed it they can have it sold in a matter of hours. If you default on a mortgage, it can take months before they can foreclose, and longer yet before the place is sold. And usually a lot more money is at stake.
Answer: Gee, a $65,000 2,200 sq foot colonial style house that has more then $10,000 in new cabinets, appliances, flooring, upgraded electrical, and plumbing fixtures, new roof, new basement, profesionally done landscaping, and a new 24′ x24′ garage. Plus another $5,000 to $10,000 into my own personal sweat equity-ie work done to the house. The bank would have less than $45,000 invested in the property. I bet they’d be heart broken to foreclose on the property wouldn’t they? With the housing market in our area going high. I’d say they’d clear anywhere from $25,000 to $30,000 after legal fees, and closing costs. (Not to mention what I have already paid in intesest on the house).
Someone could total out a new a truck without insurance, and the hit the bank takes can be almost as great as the amount of my mortgage or even more of a loss. Plus you can’t hide a house from the repo man no can you?
January 1, 1970
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