My Personal Finance Journey

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Applying a Home Equity Line of Credit

Contributed by mm | July 7, 2004 12:42 PM PST

I applied a home equity line of credit (HELOC) from my credit union today. While my net worth is increasing every month, I had a short-term cash crunch after I bought the second car. After paying this month's day care bill and home mortgage and paying off all credit card balances to avoid financing charge, my checking account will have less than $1,000 before I can get my proceeds from my recent ESPP sale. This experience allows me to seriously consider setting up an HELOC for liquidity needs in the future.

The application process itself is quite hassle-free. After spending twenty minutes on the phone with my credit union, I was approved for a line of credit of $30,000 with no set-up fee, a $25 annual fee and interest rate of Prime + 0.50%. (I have more than $70,000 equity in the house but to avoid $300-$400 appraisal fee during setup I choose to only tap into the equity under the tax-assessed value: the credit union allows to finance up to 100% of the tax assessed value or 95% of the appraised value.)

I feel it is quite a sweet deal considering my credit rating is just average (mainly because my entire credit history is only around two years). I know I can get a better deal in terms of rate elsewhere, but in this HELOC, I have no set-up fee and no obligation to take out a big chunk of the credit immediately. I have no intention to withdraw money anytime soon, but it is nice to know I can always do so if I choose. The $25 is the nominal price I am willing to pay for the liquidity I will have, and the cost of capital for any borrowed funds, at current prime rate, is less than 3.6% after tax benefits (4.75% * 75%).

The CSR also offered to increase my credit limit in a Visa credit card with the credit union from $5,000 to $13,000. Without much hesitation I accepted the offer. I have nothing to lose: the credit is carrying a very low interest rate of 6.00% and boosting the available credit capacity will surely improve my credit profile as well.

I expect to close this HELOC within two weeks. Now it is time to think about how I can do some financial engineering to make good use of the cheap funds :-)

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