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Scarlett
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So we signed the papers yesterday.  I am a little perplexed over how to figure out how to pay it back.  Our goal is to get it paid off in 5 years, but all the info talks about paying interest only...which seems insane to me....why would anyone do that? 

 

Will I just have to calculate my own payment to insure it gets paid off in 5 years? 

 

I know this is a stupid question...but I am super nervous about this whole thing since I've never had an adjustable rate loan.  I just want it paid off asap.

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Interest only was huge before the bubble. It (attempted) to let people flip homes with skyrocketing values. We know how that ended. I would divide it out, add in your interest and plan on doing it at least a year early, so that is something happens you can refi or whatever you need to do in time. So base your payments off of less than five years.

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An online calculator may be able to help you figure this out.

 

You could take the principal amount, and divide that by 60, which is the number of months in five years. Then add your interest payments to that for a monthly payment.

 

If your loan is for $10,000, for example, that is the principal amount. Divided by 60, that's a monthly principal-only payment of $162. Add it to what you owe in interest.

 

When you make payments, you need to specify you want the payments to also go toward principal.

 

Treat it like a mortgage, which has principal and interest factored into the payments.

 

Just curious, what made you decide to do a line (HELOC) versus a loan (HELoan).

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An online calculator may be able to help you figure this out.

 

You could take the principal amount, and divide that by 60, which is the number of months in five years. Then add your interest payments to that for a monthly payment.

 

If your loan is for $10,000, for example, that is the principal amount. Divided by 60, that's a monthly principal-only payment of $162. Add it to what you owe in interest.

 

When you make payments, you need to specify you want the payments to also go toward principal.

 

Treat it like a mortgage, which has principal and interest factored into the payments.

 

Just curious, what made you decide to do a line (HELOC) versus a loan (HELoan).

 

 

The fees were very low...estimated to be $750, came in at $450.  And we are doing home improvement so it is better that we take the money as we need it.

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An online calculator may be able to help you figure this out.

 

You could take the principal amount, and divide that by 60, which is the number of months in five years. Then add your interest payments to that for a monthly payment.

 

If your loan is for $10,000, for example, that is the principal amount. Divided by 60, that's a monthly principal-only payment of $162. Add it to what you owe in interest.

 

When you make payments, you need to specify you want the payments to also go toward principal.

 

Treat it like a mortgage, which has principal and interest factored into the payments.

 

Just curious, what made you decide to do a line (HELOC) versus a loan (HELoan).

 

 

This is what I was thinking.  I was just hoping I wasn't missing something.

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Make sure your loan doesn't have a prepayment penalty. We just got one, but we have to keep the line of credit open for I think 3 years. Now, ours works like yours does, we have the money available and we can draw it out, and we can pay back the money at whatever rate, (with a minimum payment) we are comfortable with, But the account has to stay open for a minimum amount of time.

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Make sure your loan doesn't have a prepayment penalty. We just got one, but we have to keep the line of credit open for I think 3 years. Now, ours works like yours does, we have the money available and we can draw it out, and we can pay back the money at whatever rate, (with a minimum payment) we are comfortable with, But the account has to stay open for a minimum amount of time.

 

 

 

Appears to be no prepayment penalty....the part that makes me nervous is there is no limit to the number of times there could be an  increase in interest rate.  But they said if the market goes nuts we can convert to a regular loan....but we wouldn't want to do that if we can avoid it because closing costs are so much.

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For HELOC, the problem people here faced was when property values went down by more than 20% and their approved HELOC amount was reduced or cancelled. We were approved for $60k and already drew out the full amount so we were not affected when prices for our floor plan went down by more than $100k a few years later.

 

We opt for an interest only loan because the interest rate is lower than a fixed rate loan. We know we will pay down and pay off fast.

 

Make sure your loan doesn't have a prepayment penalty. We just got one, but we have to keep the line of credit open for I think 3 years.

We had a $60k HELOC with the prepayment penalty. We just kept $1 owing in there until the end of the prepayment penalty period. It was funny paying the bank 1 cent in interest monthly. Edited by Arcadia
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Kind of off topic, I'm glad it came through and you can start renovating!

 

 

 

Thank you.  I am chomping at the bit but dh says these things take time to coordinate.  The workers we are hiring aren't available for a week or so more....but at least we are moving in that direction.  Plus we have dh's knee replacement in less than 4 weeks....that shouldn't stop work though. 

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For HELOC, the problem people here faced was when property values went down by more than 20% and their approved HELOC amount was reduced or cancelled. We were approved for $60k and already drew out the full amount so we were not affected when prices for our floor plan went down by more than $100k a few years later.

 

We opt for an interest only loan because the interest rate is lower than a fixed rate loan. We know we will pay down and pay off fast.

 

We had a $60k HELOC with the prepayment penalty. We just kept $1 owing in there until the end of the prepayment penalty period. It was funny paying the bank 1 cent in interest monthly.

 

 

That shouldn' be a problem since the appraisal came back so much higher than we needed.  And we have no first mortgage.

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Appears to be no prepayment penalty....the part that makes me nervous is there is no limit to the number of times there could be an  increase in interest rate.  But they said if the market goes nuts we can convert to a regular loan....but we wouldn't want to do that if we can avoid it because closing costs are so much.

 

The rate the bank sets is based off of the Prime Federal Interest rate. That moves (in general) very slowly as drastic alterations up or down can be gruesome to the economy. I'm pretty sure the Fed just increased it in either Q4 2016 or Q1 2017 (I have lost track somewhat being away from the banking industry).

 

I would not worry too much about the rate going up super high, super fast (do not lose sleep over it), but do pay it aggressively as it is nice to have debt off for a variety of reasons...as I am sure you know based on this OP.

 

Have fun with those projects! Good idea doing the HELOC!

 

 

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So we signed the papers yesterday.  I am a little perplexed over how to figure out how to pay it back.  Our goal is to get it paid off in 5 years, but all the info talks about paying interest only...which seems insane to me....why would anyone do that? 

 

Will I just have to calculate my own payment to insure it gets paid off in 5 years? 

 

I know this is a stupid question...but I am super nervous about this whole thing since I've never had an adjustable rate loan.  I just want it paid off asap.

 

One reason to pay interest only is if you are fixing a house up to sell and figure you'll get the $$ back when you sell. My parents have two houses right now. Expecting to sell one at the end of hte year. I believe they have a interest-only HELOC on some of the repairs. It will be paid when their SC house sells and then they will be back to one loan.

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Another thought I had was how much to pay when we have only taken out a small portion of the total....It feels like we should pay the amount needed to pay it off in 5 years or less from the very beginning..

 

You only pay back what you borrow. For example, if your HELOC is opened for $50k but you only draw out $10k, then you only pay back the $10k.

 

It operates exactly the same way as a credit card, but your interest is lower and you have your house securing it as collateral.

 

What that $50k means is the overall amount the bank is willing to LET you borrow off the line. What you chose to draw off of it is up to you.

 

Some people just have HELOCs open indefinitely for emergencies (I do not advise that personally, but have seen it done). They might have a $25k HELOC with a $0 balance.

 

At least...I think this is what you are asking. I am sorry if I misunderstood your post.

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You only pay back what you borrow. For example, if your HELOC is opened for $50k but you only draw out $10k, then you only pay back the $10k.

 

It operates exactly the same way as a credit card, but your interest is lower and you have your house securing it as collateral.

 

What that $50k means is the overall amount the bank is willing to LET you borrow off the line. What you chose to draw off of it is up to you.

 

Some people just have HELOCs open indefinitely for emergencies (I do not advise that personally, but have seen it done). They might have a $25k HELOC with a $0 balance.

 

At least...I think this is what you are asking. I am sorry if I misunderstood your post.

 

 

Well, I was kind of fuzzy....LOL....I mean over a 6 month period we will draw out more and more probably up to the max.  So from the first payment it seems like I should make payments as if I have already drawn the max.

 

I do understand that I only owe what I draw.

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Well, I was kind of fuzzy....LOL....I mean over a 6 month period we will draw out more and more probably up to the max.  So from the first payment it seems like I should make payments as if I have already drawn the max.

 

I do understand that I only owe what I draw.

 

haha. As I was writing my response, I thought, "I'd better put this in here in case I am misreading her."

 

Yes, you could treat the line as a loan and just pay based off the overall amount you opened the line for since you know you will be most likely using the entire thing. That would be very aggressive!

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Are you familiar with Excel?  If you are used to using it, you can set up am amortization schedule to determine how much you need to pay each month to pay the entire amount off over five years.  You won't be exact if you are not borrowing the entire amount at one time and if the interest rate changes, but you can get a rough estimate.

 

Do you know how often the interest rate is set and what the benchmark is that is used to reset the rate (In other words, the rule that is followed in setting the interest rate.)?   

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There is a difference between a prepayment penalty and a closing penalty. With a Heloc, you probably only have an early closing penalty - that means you can pay it off as soon as you would like, you just can't close the account. Our Heloc had a penalty if it was closed within the first 3 years. It was paid off after 2 but we have kept it open, just in case. No problems with any penalties.

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