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.