Friday, July 21, 2006

I'm afraid of HELOCs

Should I have gotten the HELOC? I don't know why I'm so worried about this. What's done is done and there is nothing I can do about it now. But still...

At first, we couldn't get "another" HELOC because we had already opened one to purchase the house. We took out a second(HELOC) loan to pay 20% on the primary loan. In this way, we avoided PMI. Naturally, we couldn't take out another HELOC because the equity was already maxed out when we purchased it. For the next 2 years or so, we paid for the repairs of our house with cash and good ole credit cards. We opened a Home Depot card (and should have purchased stock in the dang company) to take advantage of many of the savings we could get through their advertised offers. Other purchases went on an MBNA card that went towards getting awards points for travel. At one point, I had $20K+ on credit cards from all of the remodeling costs. I paid them off rather quickly, but still, I did pay some interest.

Recently, we remodeled our bathroom and kitchen...with cash and credit cards. Now, 2.5 years later, I could have gotten a HELOC. In the fall of last year, we refinanced and got both previously mentioned loans locked into a 5.7% 30 year fixed loan. We have since gained approximately $200K in equity in the house. So, technically, I could have opened a HELOC to pay for the $30K in expenses it cost us to remodel, but I just couldn't do it. I know about the advantages of saving on taxes from the interest paid and we probably could have "written off" some of the fees, but I just couldn't do it pyschologically.

I didn't understand that I could pay back a HELOC like I was paying back the credit card. I didn't pay enough attention before we started to realize that it would have been the smarter way to go. I didn't want to take out any equity. I didn't want to go there. I'm still not completely sure why I didn't want to do it. That'll take a bit more discerning.

What's done is done. Hindsight is 20/20.


Lisa said...

I am completely HELOC gunshy as well. We took out our HELOC for similar reasons as you. We only put 10% down and used the HELOC for the other 10% to get us out of PMI land.

How we have a lovely adjustable rate HELOC that is creeping toward 9%. Ewww. Besides that I have no intentions of ever using the HELOC to actually buy anything (after this thing gets paid off, I am going to be debt free and staying that way!)

Single Ma said...

I can understand your concern. Once the equity is established, you want to preserve it at all costs. Despite the personal experience that led you to that decision, using your credit cards worked for you. There's more than one way to skin a cat and now you have a beautiful remodeled home. ;-)

@ lisa - I also have a 2nd loan to avoid PMI, but it's a home equity loan (different from a home equity line of credit) with a fixed rate. I hate that lenders don't explain more options to potential buyers. Unless you know to ask, they only present what will make them the most money in the end. It's sickening!

Anonymous said...

I personally think housing prices are set to fall. Have you seen the reports lately? If you took out that Heloc, and the value of your home dropped (they have dropped in California before, TRUST ME), then if your mortgage company reappraises your house and the lon to appraisal ratio is higher than 80% then they could hit you for PMI again.

Locking it in at a fixed was the smart thing to do. Just take advantage of the points you get on your CC.

If for some reason you decide to get out of California, it will be easier to cut your price than for those who are completely underwater and HELOC'd to the hill.

sf mom said...

Ms/Mr. Anonymous,
I read up on real estate in San Francisco almost daily. I feel confident that we are in a good position here in SF. While we may not make $300K if we sold our house today, as long as we don't sell below what we paid for it, we'll be ok.

Locking in on the 30-year fixed loan took a huge weight off of my shoulders. I don't ever want to tap into the equity on this house. Hopefully, we won't ever have to. If we sell, we'll bank the profit and start over from there.

Thanks for your thoughts.