By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929
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Is It Time Close Out Your Secured Line Of Credit?: How Converting Your HELOC Into A Closed Mortgage Saves You Money.
A homeline or home equity line of credit (HELOC) is an open, secured line of credit product that allows homeowners to access their equity at a low-interest rate. As a result, borrowers tend to enjoy having a secured line of credit available for situations that may arise, such as emergencies, renovations, requiring a down payment available to purchase another property or to fund a child's education, and so on.
Because of its many benefits including the ability for a borrower to repay the balance at any time without penalty and the convenience of having a smaller monthly interest-only payment, HELOCs continue to be a top-rated credit product.
As such, when applying, most people will consider all of these benefits but will rarely learn about the disadvantages until they are stuck paying interest-only for an extended amount of time. Unfortunately, lending advertising dollars go toward promoting a product's convenience instead of also highlighting some of its pitfalls - go figure!
This article will explain the significant disadvantage of having a HELOC and the available solution.
A HELOC is an "open" credit product, which means it can be paid off without penalty. However, just like most borrowers will not always exercise their pre-payment privilege within their closed mortgage contracts, most will also fail to regularly pay off their home line balances. Considering that the current debt level per capita, is 177%, is it any wonder people don't make large pre-payments toward their mortgage debt?
Therefore, maintaining a large balance on a HELOC without any intention or capability of paying it off in the immediate future, means that for each month that passes by, a borrower will pay substantially more interest for no good reason.
A HELOC is a short-term loan, and if the balance cannot be repaid in the short term, it should be converted into a closed mortgage product at a lower interest rate. If a borrower still wants to make pre-payments on their closed mortgage, they can utilize the pre-payment privilege, which allows them to pre-pay up to 20 percent of the original balance each year without penalty.
Here's an example of the savings a borrower can achieve using a $150,000 HELOC.
Example 1: Keeping a HELOC for an extended period.
$150,000 HELOC at Prime, plus .50% equals $556.25 a month in interest-only payments. Over three years, that's $20,025 in interest with the original balance remaining untouched.
Example 2: Converting a HELOC into a closed mortgage.
$150,000 at 2.79%, 25 year amortization, equals $694.00 a month. Over three years, that's $11,963.76 in interest, $13,013.04 in principle; the remaining balance is $136,986.96.
If a borrower wants to save money, they should consider converting any outstanding and lingering HELOC balances into a closed mortgage. The evidence is clear that if left unchecked, paying higher interest on a secured line of credit can become a huge financial drain.
I can help you re-organize your finances to ensure you are not paying more than you have to each month. The first order of business is to identify where you are wasting money...
Let's get started today!
Sarah A. Colucci
Mortgage Edge, Broker 10680
Direct: (647) 773-4849