# Understanding HELOC correctly..



## v_tofu (Apr 16, 2009)

Hi all,

Just talked to my financial advisor, and we have enough capital to receive a heloc. I would like to use this to pay off some last remaining debt and would like some advice. Here is the background

Bank: RBC 
Household Income: $85,000
Home valuation: $300,000
Mortgage: $195,000
HELOC amt we can get:$40,000 @ P+0.5% ( I think?)

Debt:
1. Wife's Student Loan: ~$5,500 @ 5.35%
2. Car Loan: ~$15,500 @ 6.8%
3. Mastercard: ~$5000 @ 0.00% (until august, then 19.99%) I am hoping i can get this paid off before august with just our income, but my wife has been on MAT leave so money has been a bit tight this last few months. 

Questions:

1. Is heloc and HLP the same thing? She used the abbreviation HLP (Home Line program i think) I assumed she meant HELOC

2. Does it make sense to pay off these debts with a HELOC? From my limited knowledge it does, but are there cons to doing this?

3. How does one go about repaying the HELOC? Is it a monthly payment sort of thing? Or does it come out of your mortgage payments? She explained it briefly but I was in a bit of a rush and had to leave. 

4. We've cut down on alot of monthly expenses, and once my wife goes back to work, we are commited to paying off the debt ASAP. Would this make sense to do if our debt is now combined in a HELOC? Or should the money be put into other things, like RRSP, RESP, mortgage, etc.


Thanks again for all your financial help!


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## andrewf (Mar 1, 2010)

I'd use the HELOC for the car loan and credit card and leave the student loan for now. Make the minimum payments on the student debt while you repay the HELOC. Those are clear winners.

The interest on the student loan receives preferential tax treatment. With prime where it is now, your HELOC (at 3.5%) would still be cheaper after-tax. Rates might start going up so that might not be true in the near future. My advice would be to focus on repaying the other debt.


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## Dana (Nov 17, 2009)

v_tofu said:


> Questions:
> 
> 1. Is heloc and HLP the same thing? She used the abbreviation HLP (Home Line program i think) I assumed she meant HELOC
> 
> ...


1. HLP could be the bank's product name for a HELOC - this should be easy to confirm on their website. 

2. Yes, it makes sense to use lower interest borrowing to pay off higher interest borrowing. 

3. Most institutions will send you a monthly statement with the minimum payment (could be as low as interest only) and due date. You can pay it yourself or arrange to have the bank take payments from your account. It is usually separate from your first mortgage. Technically it is a second mortgage unless you are using a product like Manulife One or the National Bank All in One where the bank only registers one charge against your property. 

4. HELOCs are open (you can pay it off as fast as you like) and I always side with paying off debt before investing - with the exception of emergency funds.


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## v_tofu (Apr 16, 2009)

andrewf said:


> I'd use the HELOC for the car loan and credit card and leave the student loan for now. Make the minimum payments on the student debt while you repay the HELOC. Those are clear winners.
> 
> The interest on the student loan receives preferential tax treatment. With prime where it is now, your HELOC (at 3.5%) would still be cheaper after-tax. Rates might start going up so that might not be true in the near future. My advice would be to focus on repaying the other debt.


Thanks for the advice!

As for the student loan, what are the preferential tax treatments? My time frame for having all this paid off is 2 years, would it still be beneficial to pay the min amount on the student loan?


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## Cal (Jun 17, 2009)

2. The only real con is if you put another 5K on your CC after you have already done the HELOC.

Another pro that was not mentioned is the convenience and simplicity of having 1 set of paperwork for the HELOC rather than a car loan statement, student loan statement, CC statement......


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## mrbizi (Dec 19, 2009)

you need to realize that a HELOC puts another lien against your home - you pay lower rates but as always at a price. also, the bank typically can (although uncommon) demand payment for the entire amount anytime.


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## v_tofu (Apr 16, 2009)

mrbizi said:


> you need to realize that a HELOC puts another lien against your home - you pay lower rates but as always at a price. also, the bank typically can (although uncommon) demand payment for the entire amount anytime.


umm.. ok that is scary.. exactly how uncommon or common is it that they demand the entire amount???


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## Jungle (Feb 17, 2010)

v_tofu said:


> umm.. ok that is scary.. exactly how uncommon or common is it that they demand the entire amount???


Very uncommon, so long as you service the minimum payment.


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## whitby (Nov 17, 2010)

Don't forget that your previously *unsecured* credit card debt, will now become part of a *secured charge against your home*.


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## mrbizi (Dec 19, 2009)

...I'm not saying you shouldn't do it (I have a HELOC myself), but its always good to know what your exposure is on a deal.


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## balexis (Apr 4, 2009)

Also, if the bank puts a second lien on your house, check what the fees will be if you choose to entirely close the HELOC (ie if you sell your house). From my understanding, there are lawyer's fees of several hundreds to pay.


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## v_tofu (Apr 16, 2009)

whitby said:


> Don't forget that your previously *unsecured* credit card debt, will now become part of a *secured charge against your home*.


That i do understand. I do have it planned on being paid off in August. Just haven't put too much money into it as it is currently 0% interest

The main reason for the HELOC would be for the vehicle, and I guess an emergency fund, as the current emergency fund is well below what it should be.


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## v_tofu (Apr 16, 2009)

balexis said:


> Also, if the bank puts a second lien on your house, check what the fees will be if you choose to entirely close the HELOC (ie if you sell your house). From my understanding, there are lawyer's fees of several hundreds to pay.


Thanks for bringing that up. I don't plan to sell for a long time, but its good to know.

There are some fees she mentioned to opening the heloc (banks and their fees ), has anyone had any luck negotiating getting these fees lowered?


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## HaroldCrump (Jun 10, 2009)

v_tofu said:


> There are some fees she mentioned to opening the heloc (banks and their fees ), has anyone had any luck negotiating getting these fees lowered?


Yes, absolutely.
Do not pay any fees to the bank for setting up an HELOC.
They are already making interest off your mortgage and will make more off the HELOC (if you use it).
Most of the actual work is outsourced to financial services companies like First Canadian, Davis Henderson, etc. who have affiliated lawyers, appraisers, etc.
Their fees are usually around $300 or so.
The bank should be willing to waive this if you are (or expected to be) a good customer.

My previous mortgagee was asking for a fee (I forgot how much) for attaching an HELOC.
I was anyway planning to refinance and decided to take this opportunity to dump them altogether and move to a lender that'll offer a lower rate mortgage, an HELOC and no fees for the transaction.

Shop around.


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## v_tofu (Apr 16, 2009)

HaroldCrump said:


> Yes, absolutely.
> Do not pay any fees to the bank for setting up an HELOC.
> They are already making interest off your mortgage and will make more off the HELOC (if you use it).
> Most of the actual work is outsourced to financial services companies like First Canadian, Davis Henderson, etc. who have affiliated lawyers, appraisers, etc.
> ...


Thanks Harold. I'll try asking about the fees, but my negotiation skills are horrible, and to be honest I'm really not looking to say something like cut the fees or else.

We have been with the bank for a while, so hopefully that will have some weight in getting the fees waived, or at the very least reduced.


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## v_tofu (Apr 16, 2009)

Mini update:

well, I couldn't get the banker to remove the fee entirely. Even after mentioning my long standing with that branch.

Anyways, what ended up happening pretty much is that she waived half the fee, if I signed up for their RBC VIP account. I'm looking at what it offers, and it seems to be a fair deal. We use quite a few of those services so it seemed to make sense, despite having the 22.50/month fee.

You get the avion inifinite card with co applicant, safety deposit box, free ATM transactions including different banks atms, US account, checks, and a few other perks.

Anyone use the VIP account?


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