HELOC - need advice

[KellyJef]

Has anyone gotten a home equity line of credit fairly recently?

Can you explain to me how it works?

We bought a new house for cash that is supposed to close on August 6th. Unfortunately, our current house is not sold. It's only been 6 weeks so we're trying to stay optimistic that it will sell soon.

Anyway, my DD and SIL insisted on loaning us the $20,000 that we were short to be able to pay cash for the new house. (We're 64 years old and did not want to have a mortgage.)

We really hate, though, that we will not be able to pay them back the $20,000 as quickly as we thought we would so we are considering taking out a HELOC on the new house for the $20,000.

But I really don't understand what's involved in getting a HELOC. I've tried doing some research online but it seems pretty complicated with lots of fees. We would, of course, pay off the HELOC as soon as we sell the current house.

Any advice would be much appreciated.

[thefrugaltoad]

HELOC is a line of credit and usually takes the form as a second mortgage. There is a draw period where borrowers can use the line and a repayment period of 10-20 years. Interest is usually calculated on the average daily balance.

Since you are 64 and paid cash for the home, you may want to look at a reverse mortgage if you would rather not have a $200 HELOC payment each month. A reverse mortgage in simple terms is a loan against the equity in your home that will be paid back when you sell the home. A lien is placed on your home in exchange for a cash payment.

Hope that helps!

Paul - The Frugal Toad

[Hector]

If I and my wife gave 20k to my in-laws and we are not in hurry to have it back, we wouldn't worry if their last home is taking longer to sell. We would not want them to take loan at interest to pay us back if we dont need money right now.

[Petunia 100]

Why do you hate tying up their 20k? Can they really not afford to loan it to you? Surely they realized that you would not be paying them back immediately when they offered to loan it.

Have you considered just making interest payments to them in the meantime? You would have to do it with a HELOC. Or how about paying them monthly payments of their principal while you wait for the house to sell? Can you pay them 1k per month?

HELOCs are usually not very expensive to set up, you should be able to open one for a few hundred dollars. Interest accrues daily.

I would not consider a reverse mortgage as you will pay thousands in fees. The HELOC will be far less costly.

[bjl584]

I think that you need to have ownership of the house before you can get a HELOC, so I'm not sure how that would work in your situation. You are short $20,000, but you will need that money at closing since you paid cash for the house. But, I'm not sure if the bank will extend a line of credit to you immediately at closing so that you can turn and write a check off of a HELOC account for a home that you are in the process of buying. If they will do that for you, then setting up the HELOC will only be a couple hundred dollars.

But, it may be easier for you to just finance the $20,000 and pay it off early. Maybe on a 5 year note.

[JoshuaHeckathorn]

HELOCs are relatively cheap to obtain, but I don't think it makes much sense in your situation. They insisted on loaning you the $20K so you wouldn't need a mortgage, so why would they all of a sudden want you to take out a loan on your home to pay them back? The house hasn't been on the market that long, so start making small payments to them if you feel bad that the house hasn't sold. If it were me that loaned the money, I would be perfectly fine with that.

[KellyJef]

They insisted on loaning you the $20K so you wouldn't need a mortgage, so why would they all of a sudden want you to take out a loan on your home to pay them back?

Oh, they have not even mentioned the loan -- we just feel bad that it looks like we won't be able to pay them back as quickly as we had hoped.

We did go to a couple of banks today to get some information and I'm not really thrilled with the whole HELOC process. It seems there would be a substantial penalty for paying the money back to the bank as soon as we sold the house plus the monthly payments until the house sells.

I think we'll give the money we would have spent getting the HELOC to my daughter and son-in-law instead.

Thanks for all the replies -- they were helpful.

P.S. There was a segment on the local news just now that NY has the highest closing costs when buying a home in the WHOLE country. The average closing costs for a $200,000 house are $9,983. That's awful.

[JoshuaHeckathorn]

Oh, they have not even mentioned the loan -- we just feel bad that it looks like we won't be able to pay them back as quickly as we had hoped.

We did go to a couple of banks today to get some information and I'm not really thrilled with the whole HELOC process. It seems there would be a substantial penalty for paying the money back to the bank as soon as we sold the house plus the monthly payments until the house sells.

I think we'll give the money we would have spent getting the HELOC to my daughter and son-in-law instead.

Thanks for all the replies -- they were helpful.

P.S. There was a segment on the local news just now that NY has the highest closing costs when buying a home in the WHOLE country. The average closing costs for a $200,000 house are $9,983. That's awful.

I think that sounds like a good plan. I'm sure they'll be happy that you're at least making some payments, and hopefully the house will sell soon. Good luck!