Home Equity Line of Credit

[Dave Fritz]

We're taking out a home equity line of credit in anticipation of purchasing a new home before we sell our existing home. We've no experience in doing this and were surprised to learn we have been asked to sign a document telling our home owners insurance the lender is a lien holder on our home. We haven't borrowed any money and may not in fact even need to borrow. Since there is no cost to take out the loan we were advised to have one just in case.

Is this standard practice to add a lien on home owner's insurance?

[Jim Becker]

We're taking out a home equity line of credit in anticipation of purchasing a new home before we sell our existing home. We've no experience in doing this and were surprised to learn we have been asked to sign a document telling our home owners insurance the lender is a lien holder on our home. We haven't borrowed any money and may not in fact even need to borrow. Since there is no cost to take out the loan we were advised to have one just in case.

Is this standard practice to add a lien on home owner's insurance?

Yes, it's standard because you are borrowing based on the value of the property for the HELOC and the property is therefore, securing the lender for the amount they are lending you. The same would be true for a bridge loan that's commonly used for the same purpose (buying the next property before the current one is sold) but is for a fixed amount and generally "interest only" for the approved length of the bridge loan. If your current property "burns down", the mortgage/loan holder(s) get their money first before you get anything left over.

[Dave Fritz]

Thank you Jim, excellent explanation.

[Ken Fitzgerald]

That's similar to what we did in Idaho for a bump out on our kitchen.

It also allows the lender to recoup their investment should the borrower take out the loan and then sell the home.

[Jim Koepke]

We did something similar when we moved to Washington from California.

The home we were buying was a prefab and the lender didn't loan on those. So we took out a loan on our old home to pay for the new home. We then rented out our old home to one of our daughters and S-I-L. Their rent was a little less than our mortgage payment but that is a different story.

When our 'kids' moved out we sold the home and made a bit above the payoff of the mortgage.

Right after we moved the real estate market collapsed. Technically we were under water on the loan. California is a non-recourse state. This means if a borrower on a home walks away they can not be forced to pay the lean holder anything in most cases. I do not understand the laws, but we didn't walk away. In the time between the market drop and when we needed to sell, the market shot back up again and some broker purchased our old house for enough to pay off the loan and put a good chunk of money in our bank account. We may have even been able to get more for it, but that is water that has already gone under the bridge.

jtk

[Maurice Mcmurry]

We still have the home equity line of credit that we got to build the garage/shop in 2009. We also used it to help the kids get into homes of their own. We a have zero balance but the bank still "holds the paper" for a good portion of the value of our house. They add our maximum credit limit to their capital and profit by leveraging the equity line of credit with our house as collateral, even though we have a zero balance. Because our house adds to their capital, home owners insurance is required.
A sad story and word of caution, Our neighbor, a single mom with 3 kids who owned her home outright, got a new boyfriend who talked her into getting a home equity line of credit. He did a few things for her house, bought himself a Harley Davidson, a Pick Up, a trailer, and a riding mower. Then they made the minimum payment for ten years not realizing that they were compounding interest. When the credit line ended their interest bill was so big that she lost the house. Foreclosed on by the bank. A bank will gladly let you hang yourself. They will also provide the rope and show you how to tie the knot.

[Bill Dufour]

We got a PAL Pledged asset loan from our broker. Same idea but you pledge some stocks/bonds as assets. As I recall it was about against 70% value of good stocks 45% against Tesla since it was going up so fast. Interest was very low like the London long term rate even though i am in California.
Doing this let me keep my Tesla for about six months while it kept climbing. Once it slipped I made 75,000 profit and paid off the loan. I paid about $1,000 interest to do this.
Since it is based on stocks no appraisal fees, no inspection, no title search etc. Stocks can not be in an IRA.
Bill D

[Thomas McCurnin]

Yep, the insurer has to be on board, in the unlikely event there is a fire etc, home destroyed, and without a lien, the HELOC lender would be unsecured.

[Brian Elfert]

Didn't the laws change after the great recession so that home loans have to have a payment high enough to at least cover the interest? I screwed myself with a home equity loan that was interest only for the first ten years. I planned to sell my house well before the ten years was up, but the great recession killed the home sale idea. I came close to the ten years, but managed to sell the house before the principal payments kicked in. I save a considerable amount of money every month, above and beyond my retirement savings. That money I save is for emergencies, home repairs, and the like. I would have had to stop all but my retirement savings to cover the principal payments on that home equity loan.

I would never take out another interest only loan, or pay it like it a regular loan if I did. I don't know that you can even get an interest only HELOC these days.

[Jim Becker]

Brian, are different setups for straight real estate equity loans vs a home equity line of credit when it comes to terms and sometimes things transform during a particular event. I gave one example in a previous response...we used a bridge loan to allow us to close on our new property before the old one was sold. It paid off the existing HELOC on the old property and minimized out of pocket cash for our new property purchase. That type of equity loan was interest only but the lender considered it a HELOC because the final amount was variable until locked in at settlement on the new property.

[Stan Calow]

. . . We haven't borrowed any money and may not in fact even need to borrow. Since there is no cost to take out the loan we were advised to have one just in case . . . "

Dave, the lenders like to promote the idea that "you're just using your own money", but in fact, you are borrowing money when you take out your equity. Your equity is money you paid to the lender, so they are now just lending their money back to you. And that money must be repaid, and the lender is co-owner of the house until the whole loan is paid off. This sales pitch is how a lot of people got underwater in the crash of 2007.

[Dave Fritz]

Thanks for that comment but in our case we were never told we were using our own money. They made it clear there would be no charges until we activated the loan by taking out money, then we would pay interest. I know of people that do some really irresponsible things using loans but we're very fiscally conservative. You can't prevent people from doing stupid things, sadly in 2007 there were institutions that let and even encouraged people do that. To some extent we saw that again recently with bank failures. The regulations that were put in place after the 2008 mess have been reduced since and here we go again. Personal responsibility is a valued trait.

[Brian Elfert]

The recent bank failures seem to be more about the banks making the wrong investments with their assets rather than loan issues.

[Rich Engelhardt]

An equity line of credit and/or a home equity loan are two tools you can use to unlock the "treasure chest" which is the mass of capitol you have - just sitting there doing very little.

Shop around for the best package - no or very low closing costs. No penalty for early payback. Low rate. Ability to tie it to other bank functions (no charge checking, free deposit box, etc). General health of institution. Who is going to own the note - them or are they going to sell it? (our mortgage lender just sold our note, less than 6 months after we closed on the house).

Just make sure you reinvest it wisely and have it covered in the event things don't work out.

[Rich Konopka]

The recent bank failures seem to be more about the banks making the wrong investments with their assets rather than loan issues.

SVB failed because they had to write off $1.8b of the treasury's they held for liquidity had depreciated. Thanks to the Fed’s aggressive rate hikes to fight inflation it made their bond holdings less valuable because the current bonds are now yielding better returns. This spooked the markets because treasuries are considered the bedrock of our financial systems and held by all banks.

Now Credit Suisse was a different story.

[Tom M King]

I'm glad I'm not in the money borrowing business these days. I miss the times when you could walk in and come out with a 90 day note on your word, just from reading this thread.