The loan amount is much lower, and the bank says they will pay the “closing costs”?
Here is the info from the online chat:
The minimum we off to request for the line of credit is $10,000 however you only pay on what you use that is what is great about the line. SunTrust will cover closing costs you just have to keep the line open for 3 years, even if it is paid off. The estimated payment would be $112.50 and would decrease as it is paid off. Let me get you additional details on this line.
[01:16:56 PM] The Access 3 Equity line gives you three convenient and different repayment options, letting you choose how advances from your line of credit are repaid. You choose the right option to fit your specific need, up to your approved limit, to finance different purchases. The three options are a revolving line of credit interest only and a fixed rate/fixed term. What’s really great about the Access 3 is you can use more than one option at the same time…
[01:17:10 PM] : For your convenience, each of the three options can be accessed by using special Access 3 Equity Line checks issued in your name and a special Visa® is available to access the revolving line of credit option. Now that’s financial flexibility! By having an open line of credit you save money and time by not having to apply repeatedly for a loan when you need money. What do you think about the SunTrust equity line? Will this line meet your needs?
The only problem I, a layman, see is that you are turning unsecured debt into secured debt. That means if you couldn’t pay off your credit cards, they nail your credit rating. If you default on the LOC, the bank can take your house.
HELOCs or Home Equity Line of Credit seem to always be adjustable rate as compared to a straight out Home Equity Loan.
So while they have nice rates right now (5% or so) compared to a locked rate of a Home Equity Loan (7.5%) they can definately go up with the prime rate.
Don’t forget that the interest is also deductable on your taxes making that 5% rate almost a 4%.
I’ve seen articles warning people not to take out home equity loans or lines of credit to pay off credit cards but they always seem to be under the assumption that a person who pays off their cards with the money will just run them up again.
If you can honestly get rid of your credit cards for good after paying them off I see no downside to using home equity to pay them off.
Some equity lines can be fixed or you can fix portions of them. Say if you used one of the checks to buy a new ride around mower, you could just fix the rate on that portion of the line. Any part of the line you haven’t used will still have a floating rate.
Check with your CPA before you decide if the interest is tax deductable.
There is often a prepayment penalty as in the OP’s example. If he closes the line before 3 years is up he will be responsible for the closing costs. Typically an appraisal, title work, and recording. But you can just leave it open with a zero balance. The problem with that is the full limit counts against you when shopping for other credit.
Then there is recourse depending on where you live. Some states are some are not. I don’t know about Biafra. This means, God forbid some thing ever happens, the bank can take the house as well as continue to go after you for any excess balance.
The lender should give you a good-faith estimate of the closing costs (in writing!) before you sign anything. It depends how much paperwork they want to do (credit check, title search, lien search, etc. Some but not all will want to do an appraisal, and all of this stuff varies in cost by location.)
Personally, I would not turn unsecured debt into secured debt for a less than $200 savings. And don’t forget to add in the closing costs. It doesn’t sound like a good idea, at least not at these numbers.
Get the details on this before you do it. Often to fix a portion they jump the interest up a point in order to lock it. It’s often free to lock it the first time but they may charge a fee for future locks ($50?). Also, you can unlock those fixed portions at any time with no penalty.
And also running up the HELOC, which can be a problem for some. Just because you don’t have to borrow the whole amount doesn’t mean you can’t, and an open line of credit is not a great idea for everyone.
It’s a bigger problem than you’d think. Many people who find themselves with lots of credit card debt lack the financial discipline to keep from doing that once the credit card debt is transferred elsewhere.
If you do not make the payments, you can lose your house.
This is not like defaulting on a credit card.
If you are having trouble making your credit card payments, this is a bad idea. If you are now making payments on time, in full, all the time, every time, this might save you some money. I expect that the instant you miss even one payment on the HELOC, they will jack the charges up far enough that this will cost you more than your credit card.
There is a reason the bank wants you to do this, and it is not because they like you or want to make your life easier. Why do you think they want to give you a Visa card so you can spend this money?
You know your payment history better than we do, of course, but the fact that you are carrying a balance on your credit card suggests that you need to make changes in ways other than borrowing against your house. I would suggest what I generally do - starting ten minutes ago, never carry a monthly balance on your credit card, for any reason.
