My Personal Finance Journey

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Applying for Home Equity Line of Credit (HELOC)

Contributed by mm | February 13, 2014 4:33 AM PST

When we purchased the our house back in January 2013, we put 20% down payment to secure an ultra-low 1.875% APR 7/1 ARM. In anticipation of potential carry trade opportunities, I'm also exploring possibilities to cash out some of our home equity through HELOC, or Home Equity Line of Credit.

HELOC offers homeowners the flexibility to borrow against their home equity at a variable rate often pegged to a major lending rate index. It works much like a credit card, so over a pre-defined "borrowing period," the borrower can borrow and repay up to a credit limit multiple times. (Its sibling, Home Equity Loan, works more like a mortgage where one borrows a lump-sum upfront at a fixed rate.)

Back in 2004, I established an HELOC account at my local credit union with a credit limit of $30,000. Although I never got a chance to tap into the credit, I see it as a good insurance against occasional liquidity crunch.

Plus, HELOC interest is deductible on the first $100,000 balance (for married filing jointly, lower for other status), making it a much low-cost financing option compared to credit card, auto loan and such.

So, over the course of last week, I started a couple HELOC applications. One through Wells Fargo, who originates and services my current mortgage. The other is thru my local credit union.

Here are the initial quotes I received:

Wells Fargo: up to 85% loan-to-value (LTV) ratio, best rate = WSJ Prime Rate + 1.00% (currently 3.25% + 1.00% = 4.25%)

Credit Union: up to 90% LTV, best rate = WSJ Prime Rate + 0.50% (currently 3.75%)

Now both financial institutions need to check my tax record and credit history, and get an appraisal to get the ball rolling.

Keep tuned as I'll keep reporting back on the progress of my HELOC application.

This Post Has Received 29 Comments. Share Your Opinions Too.


2million Commented on March 9, 2014

MM, I was a bit surprised when looking at your balance sheet to see a primary home worth ~$1M. Would like to know more about your thought process there -- if your net worth goal is $3M do you foresee 33% of your net worth tied up in your home? Or do you plan to keep it leveraged or downsize in the future?


mm Commented on March 17, 2014

Thanks for commenting 2million!

Yes, we do plan to downsize in 7 years time when we will be empty nesters. This house will likely be our largest house in our life time.

When made the offer in November 2012, the housing market valuation was very reasonable. We did some calculation and concluded that if house value appreciation will be in the 3% range there is almost little difference between owning a $1M home or a $700K home.

This may deserve another post but in short:

- The additional cost of ownership for a $1M home (over a $700k one) is ~$4K in property tax, ~$6K in interest @ 2% APR and ~$3K extra utility and maintenance. The first two are tax deductible, so the total additional cost of ownership is about $10K.

- If both houses appreciate at the same rate of 3%, then the $1M house will go up $9K more, which almost offset the entire additional cost of ownership.

And the 3% appreciation is more than reasonable due to the initial valuation. The more the appreciation, the higher growth from the bigger home.

Your thoughts?


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