When easy money goes away…
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This is pretty much an apples to oranges comparison. An ARM is a "First* lien position loan. A HELOC is a "Second" Position loan(Unless the house is free and clear then it would be in first position) that is place behind the first mortgage and can be used in a few different ways. If a buyer only has 10% to put down, they will have to purchase Mortgage Insurance being that the loan is greater than 80% of the purchase price. You can avoid the PMI by doing an 80% LTV first mortgage and a 10%LTV HELOC so they still get their 90% financing. A HELOC can be taken out at really any time as long as there is enough equity and the clients qualify. HELOC's are like a credit card, you can reuse the loan over and over as long as you pay it down like a credit card just secured by your home. HELOC's can get tricky as they typically have an interest only payment option and a full payment option. Some banks have variations of different payment structures. HELOC's have the option payment for usually 10yrs and then converts to a fully amortizing loan for the next 10yrs. If you only make Interest Only payments, the principal gets added to then backend when it converts. Again, different banks have different structures, I am generally speaking to give you an idea of how they work. A HELOC is less risky as the loan amounts are lower than a first mortgage and if values drop, the total between the first mortgage balance and the HELOC balance could equal more than the house value. If this happens and you don't pay, the bank won't foreclose as there is negative equity and they would lose even more money trying to go through the foreclosure process. I hope that is somewhat reasonable to follow as there are quite a few variables that come into play.
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HELOC Interest-only payments seem good for the short-term but not always long-term.
Significantly higher monthly payments are inevitable once the interest-only period ends. Borrowers could be stuck with an unideal Balloon payment at the conclusion .
If these increases are not budgeted for the borrower is screwed and potentially unable to make payments.
Obviously if one is only paying loan interest the principal is still there. Longer the borrower waits to pay down the principal the longer the borrower is paying off loan.
Significantly higher monthly payments are inevitable once the interest-only period ends. Borrowers could be stuck with an unideal Balloon payment at the conclusion .
If these increases are not budgeted for the borrower is screwed and potentially unable to make payments.
Obviously if one is only paying loan interest the principal is still there. Longer the borrower waits to pay down the principal the longer the borrower is paying off loan.
HELOC's don't have a Balloon payment. Whatever the balance is remaining at the ten year period converts to a fixed amortized over the remaining 10yrs. I always try to explain in as layman form how these things work to clients. It is literally like something from outer space to most people and if they don't have a clue what they are doing with the payments then they can certainly get into trouble. Most people in the Financial industry don't try to even give the slightest education to their clients which is a complete disservice to both you and your company and your client.
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@GDF educate me on this
If a Borrower gets to the point of 401K withdrawal, he/she is truly f-cked IMO.
“Sometimes a HELOC is structured with a balloon payment at the end of the loan's term. This is generally because the HELOC is amortized over a longer period of time than the term of the loan, meaning that the monthly payments aren't enough to completely pay off the balance of the loan during the repayment period. At the end, you must make a lump sum payment to pay off the balance of the loan in full. This payment can be sizable, even as large as your entire principal amount.
Suppose you borrowed $50,000 for 10 years at a 4.5 percent interest rate. Your monthly payment would be $253.34 (assuming it included principal and interest), ending with a balloon payment of $43,766.76.”
“Some HELOCs have a balloon payment feature. Like a balloon mortgage payment, a HELOC balloon payment is at least twice as much as a regular monthly payment. But it might also be tens of thousands of dollars — a lot of money to come up with all at once.
7 ways to get out of a HELOC balloon payment
How does a ballon payment work?
Balloon loan FAQs
7 ways to get out of a HELOC balloon payment
There’s no one-size-fits-all solution to avoid a HELOC balloon payment. It depends on your personal financial situation. Below are some options.
Pay off your HELOC in cash
Refinance your HELOC
Use a balance transfer
Take out a new loan
Make bigger payments now
Ask for help
Borrow from your 401(k)”
If a Borrower gets to the point of 401K withdrawal, he/she is truly f-cked IMO.
“Sometimes a HELOC is structured with a balloon payment at the end of the loan's term. This is generally because the HELOC is amortized over a longer period of time than the term of the loan, meaning that the monthly payments aren't enough to completely pay off the balance of the loan during the repayment period. At the end, you must make a lump sum payment to pay off the balance of the loan in full. This payment can be sizable, even as large as your entire principal amount.
Suppose you borrowed $50,000 for 10 years at a 4.5 percent interest rate. Your monthly payment would be $253.34 (assuming it included principal and interest), ending with a balloon payment of $43,766.76.”
“Some HELOCs have a balloon payment feature. Like a balloon mortgage payment, a HELOC balloon payment is at least twice as much as a regular monthly payment. But it might also be tens of thousands of dollars — a lot of money to come up with all at once.
7 ways to get out of a HELOC balloon payment
How does a ballon payment work?
Balloon loan FAQs
7 ways to get out of a HELOC balloon payment
There’s no one-size-fits-all solution to avoid a HELOC balloon payment. It depends on your personal financial situation. Below are some options.
Pay off your HELOC in cash
Refinance your HELOC
Use a balance transfer
Take out a new loan
Make bigger payments now
Ask for help
Borrow from your 401(k)”
For some context my fixed mtg is currently 40% of home value. I have access to a HELOC that’s 15% of home value. Not much risk to me or the lenders. Even if rates go to 15% what are the odds prices fall 45% and I lose my job and the market falls ALOT. Even from 2005-2012 real estate in my hot Tampa market was down 30% and although my stocks were down I still had a job with plenty of other opportunities if I desired. It’s all a numbers game and not always scary. Oh, and my HELOC gives me access to funds I think for 20 years before a 10 year amortization. I’ve only accessed it twice as a very short term loan so that I didn’t have to sell securities or any of my guns. 😉
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The guns. Never sell the guns. You’ll need ‘em and your go-bag if things really get silly. 👍☠
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Signature Bank in New York just collapsed today on a Sunday and was taken over. Based on the articles it sounds like they were largely crypto focused. Goodbye banks and crypto (that digital thing that was supposed to be different than banks).
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Yup. Looks like First Republic just had to get money from JP Morgan and the Fed to shore up capital.
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Looks like the Fed is bailing out SVB and others collapsing while creating new ways to issue debt for banks to add assets. Kick the can down the road
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I’m now raising equity…
![Sky Building Skyscraper Nature Tower]()
hotel needs to fix the lawn sprinklers!!!
hotel needs to fix the lawn sprinklers!!!
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Joe Biden came into town. Blocked traffic and caused numerous flight delays…rumors are, he stayed at Trump Towers
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Well, still a ton of easy money to be made out there. Flipped some regional bank stocks for 40%+ over the last few days. Got to love a bit of panic
Lost in above HELOC and ARM discussion is when you most need debt, you least can qualify. I.e., if this rumored recession takes hold those looking to get out of higher rate, higher pmt debt won’t have jobs and/or the value in their homes to qualify for a new loan. This condition snowballs fast.
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It will be far worse than TARP and the way the politicians and Fed do things today vs under Paulson is they give all the money for free. At least under Paulson the banks paid back their loans plus some. This time around, FNMA and Freddie mac barely have any retained earnings to offset losses thanks to Obama administration policies. Trump put a hold on the payments to let them shore up some capital, but that was only a couple years, not enough to withstand even a 1% foreclosure rate
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