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What should I be looking out for in the small print?
For the terms. Some HELOCs are tired to the prime rate. Meaning they can be higher or lower than the prime rate. It is better to get one that is below prime rate. See if they offer to convert it to a fixed rate, or a fixed rate now if its a good rate.
Many HELOCs only have a limited draw period which is 10 years from the opening of the account. After that, if there is a balance it gets converted to a specific length loan like 20 years to pay it off.
The other terms to look for, is what is the requirement payment. Some HELOCs allow you to make interest only payments, which may come in handy if you are unemployed. While others do a calculation and have a minimum of what needs to be paid each month regardless of the balance. Again, you don't want to be obligated to make larger monthly payments if the timing in your finances isn't right.
The other thing, if they do want to charge you fees, like thousands to do this, don't fall for the "there is no out of pocket cost for this loan to you" because they are rolling those fees into the HELOC loan balance.
If you already have a mortgage on your home (referred to as a primary) and you want a HELOC, beware that the interest rates they quote you are typically for just the primary mortgage. This has to do with loan ratios. For example, if you want a $200K mortgage on the primary and $100K in a revolving line of credit in your HELOC, the mortgage company looks at this as loaning you a total of $300K, so the interest rates might be higher than if you just got the $200K mortgage with them. Usually they won't loan/extended credit to you higher than 80% of the appraisal value of the home, but if you do, the interest rate will be much higher.
Some banks give you a discount on the mortgage and HELOC if you open a checking account with them and have the payments done automatically out of their checking account.
Don't think of the HELOC as a separate loan, even if you get it from the place that you got your primary mortgage because whoever has the loans thinks of them as one big thing.
I didn't know about the annual management fee. Thanks.
I am thinking about a HELOC because I want to buy a smaller house first and then sell the house I am in.
You have to look at the terms for the HELOC. Some might restrict you from using the cash to buy securities or real estate.
What you might do, is look into a cash-out option on your primary mortgage and don't bother with the HELOC, if they have rules restricting the use of the HELOC funds. This way they loan you the mortgage plus $X cash you need to help you buy another home.
Again, banks have different rules so you have to look at things carefully.
As for buying a second home, most mortgage companies these days unless you are a first time home owner, require 20% down. So you would need at least 20% on the second home.
I don't think I understand what you mean by a refinance cash out.
Refinance I understand but cash out I don't.
Let's say your home has a professional appraisal market value of $500K.
You have a mortgage balance of $200K.
80% of $500K is: $400K.
$400K is what the mortgage company will loan you. So you ask for a $400K mortgage, but you want them to wire transfer the $200K into your checking account.
Once the $200K is in your checking account, you can use the funds.
You don't need a HELOC to get the $200K. In fact, you don't want the HELOC in this case, because you would have to make two loan payments each month. One for the mortgage and the other for the HELOC. This way, you would have just payment for the $400K. Yes, it will be a higher payment than your current mortgage, but still less each month than paying off a $200K HELOC, plus your mortgage.
1) Do not tell the bank of your plan
2) Find out if there's a fee to pay off and close the HELOC within a time period.
I don't agree with that. What the OP wants to do isn't unusual. It is best to shop around for a mortgage company/bank that will understand the OP's needs and present workable options.
The fine print can have stuff that is punishing if you don't follow the rules. Also, you sign your name to these documents and you should not lie, which opening yourself up to more trouble for no good reason.
If the OP wants to purchase a second home, it matters if the home is already there vs. buying land and having one built. Purchasing a second home which is built is better because you are adding an asset they can easily sell if you default on the loan. But empty land with perhaps a half-built house has far less value to them.
Won't they find it odd if I am wanting to max my HELOC?
What do I say if they ask?
The timing of you maxing out your HELOC after the loan is available to you isn't likely to get a phone call or letter from them asking what is going on. Again, don't lie or hide things from them. You will just get into trouble and a good loan officer understanding your needs will be able to come up with things which might be better for you.
I went on bankrate.com and wasn't able to find anything.
I must not have been inputing the numbers correctly.
How did you find this?
Not everything is on bankrate.com. For example, if you move over a huge portfolio and have excellent credit, they can offer you options and discounts that aren't advertised.
Another thing, people don't realize you can negotiate the interest rates on loans. So you go to bankrate.com or someplace that offers you the lowest possible interest rate as a quote. Have them e-mail it to you with all the details. Use that to get one of the big banks to lower their interest rate to match it. You really don't want to go with someone who just has the cheapest cause you are going to need a real estate attorney to review it all to protect you and it isn't worth the cost and time. They might not even offer a HELOC.
The larger banks can offer you other stuff the more business you do with them.
By the way, being straight with the loan officer at a big bank is going to be better for you, cause they might come back and find out you would be better offer simply having a second mortgage for the second home instead of providing you with the cash to pay for it.
The little lowest rate places you see online usually offer limited services.
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