Posted: Wed Dec 07, 2005 2:47 am Post subject: Can I use HELOC as Emergency Fund?
I am just 30, and I have a house worth $550,000 and I owe 360,000. But I have no real savings except for an IRA with about $67,000 invested in a mutual fund. I don't have any emergency fund to speak about. I have got a suggestion from one of my well-wisher to use home equity line of credit instead of an emergency fund. What do you say? _________________ Need help choosing the right loan? Get free consultation from community lenders/consultant
I think your well-wisher is right a home equity line of credit can serve as a nice backstop in providing you funds at the time of emergency. But if you opt for this option it is important to have your credit line in place before you need it.
Posted: Wed Dec 07, 2005 3:16 am Post subject: RE:
Hi,
I agree with Jill. You can use home equity line of credit or HELOC instead of emergency funds. But a drawback of HELOC is that it is an adjustable rate loan and the current rates are rising for adjustable rate loans. Even with a HELOC you may have some extra cash. This cash amount may not be equal to 3 to 6 months of living expenses but it can certainly be of substantial value.
Welcome to Mortgage Fit. I agree with Jerry, a HELOC initially might sound like a good thing but normally they are adjustable. There are some that have fixed rates. Sometimes having a HELOC can have a negative effect on your credit, it depends on how they report it to the credit bureaus. If you are set on getting a HELOC then I would suggest you really research and find the best deal for your situation. Look for ones that have fixed rates instead of adjustables. Have you considered a Home Equity Loan instead of a Home Equity Line of Credit? I know you wouldn't have the luxury of having a line of credit but that would be another option for you to consider. _________________ Cliff and Sandra
Loan Officers
Conventional & Sub Prime Specialists
Loans done in 50 states
HELOC has a major disadvantage as it is exposed to interest rate risk. Since, all HELOCs are ARMs and are much more risky than standard ARMs. Market changes quickly influences HELOC.
Smaller HELOC like $2000 may be considered as revolving credit and so, can affect your credit utilization ration in a big way.
Posted: Tue Mar 28, 2006 11:29 am Post subject: HELOC credit effect - please elaborate more
I just purchased a home as an 80/20 transaction with a HELOC for the 20%. (I will sell my previous home and use the proceeds to pay down the HELOC, but the home is not yet on the market.) I just received my updated credit report (I have credit monitoring service) and my $82,000 HELOC is being counted in my revolving debt, making it appear that I have HUGE unsecured liability. I called my bank but they refuse to report it as a mortgage.....is there legislation anywhere that outlines how the bank has to report the loan? They say b/c it is revolving, they report the same as a credit card even though it is a mortgage secured by security interest in my home. (They do notate on the comments that it is secured, but it reports as an R-1, not an M-1). My score dropped 56 points when this revolving debt was added. Help!
Here HELOC can be considered as a third mortgage. Since the first and second mortgage have priority in default situation, so that makes HELOC a riskier loan and reported accordingly.
Last edited by jameshogg on Tue Mar 28, 2006 4:56 pm
HELOC is a revolving loan that is secured against the value of your home. Since your home is kept as collateral, so you can borrow funds at a lower rate compared to what is charged by the credit card companies.
But HELOC and credit cards are considered alike in the sense that both of them are lines of credit and the size of the line along with the amount of available balances affects your credit score.
HELOC is not going to help your credit score. HELOC is a good one as long as it is used to make large repayments and is taken for a short period.
Posted: Tue Mar 28, 2006 2:55 pm Post subject: HELOC
Thank you all for the responses....I think I may be asking my question in the wrong forum b/c this is not quite the detail I was looking for....I actually stumbled into this site and was in a bit of a rush when I typed out my question...and I apologize, I should have read the previous postings in greater detail before entering my question :=) I am inquiring more as to the reporting structure within the Universal Rating Code and Instant Merge Credit Reporting Key used by the major reporting bureaus....and any legislation regarding the same. I admit that I am not up on the credit legislation these days b/c I am in mtg operations now and not in the field.
One thing I do have a curiosity about are the references in the above indicating that a HELOC is a third mortgage....are there secondary market investors who will take 3rd position under a HELOC?....This threw me for a bit of a loop, but I guess just about anything is possible these days! :=) And thanks again to everyone for the replies!
There is not any kind of legislation that can force a lender to report a HELOC in any specific format. A HELOC is a revolving debt just like a credit card. The fact that it is secured does not matter. Some of the information above is not correct. You have a 2nd position HELOC and while it is possible to get a third position heloc that's not what you are asking about.
Your credit scores will improve even with the HELOC shoing over a period of a few months........your other option is to call the lender and see if they have a fixed rate option or refi into a fixed rate second. _________________ Cedric Kalvesmaki
***Professional Disclaimer***
While I am a Mortgage Professional, this advice is generic in nature only.
I think James missed it somewhere while going through your post. You have a HELOC in the second position and there is no question of any third.
HELOC is a revolving credit like credit card the only difference being that it is secured against your home's value. It is not going to be reported as a secured debt.
As Cedric suggested, you can look in for a refinance option.
Posted: Wed Mar 29, 2006 9:40 am Post subject: HELOC
Hi gang,
Good news (in case anyone is interested in how my problem turned out). I did a little research last evening in regard to the credit reporting standards and practices of large mortgage companies (ie the W's and C's of the world)...and the vast majority report HELOCS as M-1 with a few reporting as C-1 (secured line of credit). My bank is now in agreement after reviewing the Universal Rating Code in greater detail, that the mortgage factor (M) would take precedence over the fact that the repayment happens to be revolving...and they have changed my credit report effective today. (As well a changing their reporting practices for all bank customers HELOC accounts). Yea!
One thing I learned from this experience that will help me in my job is that when one of our borrowers has a very low score but no credit card debt, no derog and no delinquency, no collections or other negative factors such as too much or too little credit....we will be definitely be checking to see if they have a HELOC reported by a small bank as a charge account. If the borrowers bank is willing to change its reporting structure, your borrower could get a huge boost in credit score, helping them to qualify for the loan they need.
Take care....and thank you all for your willingness to advise!
jerry
