Pay interest on a HELOC if you don't use it?

18 Replies

I applied for several loans (HELOC and Home Equity) for a deal I'm trying to do, got approved for both types, narrowed it down, decided to go with the HELOC (interest-only minimum payments for the first 10 years) for the reuse-ability and what I thought was the fact that you only make interest payments on the amount used, similar to the way a credit card works.

Wellllllll I emailed to loan company and told them to withdraw my application because I don't want that (Home Equity) loan anymore, and the representative called me to find out why. So I explained to him that I want to be able to reuse it over and over, and I may not need the LOC immediately (if the deal falls through) so I don't want to be stuck making an extra (loan) payment if I don't have an income-generating property to subsidize it. So he proceeded to tell me for like 10 minutes (despite my objections) that the HELOC people are lying and I have to not only make an interest payment every month even if I have a zero balance, but since the interest rate is variable it is a lot more risky (I know he's right about that part). For example, if the HELOC is for $50k, and the interest rate is 4%, I will be making a $166.67 monthly payment whether I've maxed out the line or used nothing at all. Well, I called BS, so after about an hour of googling it, everything I could find (all general advice, no specific bank disclosures) was a recurring theme of "One benefit of a HELOC is that you only make payments if you use it." But I'm a newb, so there is VERY good chance I've gotten this all wrong. Have I?

Does anyone have a HELOC that requires you to make a monthly interest payment (or any other payment) even if you have not drawn against the loan at all?

P. S. I also emailed the loan provider asking the same question, but it's after business hours so I don't expect an answer for awhile

I've never heard of a HELOC that requires you to make minimum payments on a zero balance! What would you be making payments on? Sounds like your banker is the newbie! (Or is trying hard not to lose his commission on the closing of your equity loan!)

As you've already determined, the interest rate is less important to many investors than the flexibility. And those months when you're paying zero tend to balance out the months when you're paying a slightly higher variable interest rate. 

Not only that, but if you're paying interest-only on your HELOC, your actual payments are a little lower than a second mortgage that is amortized.

NO! I just got a HELOC from a local bank & I must say those guys were awesome! No payments at all until money is used & only have to use at least once per year to keep the loan active. IE: "you can borrow $100 dollars each year & immediately pay it back the next month & that's minimum requirement". Get a new bank would be my suggestion.

Also, my particular bank had $0 closing costs for me. 

@Jeff Copeland That was my thought.. If there's no balance, how do you know what interest to charge me? and if you really are going to just charge interest on the entire loan amount, regardless of the balance, then why does anyone get a HELOC anyway? Why not just get a loan every time with a guaranteed (and usually lower) rate and payment?

Originally posted by @Kimberly N. :

Also, my particular bank had $0 closing costs for me. 

Thanks, glad to hear I'm not crazy. The HELOC bank (different from shady loan guy) also offers $0 closing, just a yearly maintenance fee which is negligible in comparison to the benefits. That was another thing I was annoyed about with the equity loan, they didn't really mention it but once I got the actual paperwork and worked through it, I was paying about 10% of the loan amount just in origination fees, so that's 10% less capital to make work for me. Such crap.

Nope, my HELOC only required an interest payment on what you use. If you haven't withdrawn anything from it then you shouldn't have a payment. Although, I'm sure banks differ and some may require a minimum monthly payment no matter the balance.

@Megan Clancy I have two HELOCs and your understanding of how a HELOC works is correct. It's similar to a credit card in that if you have a zero balance you will not have a monthly payment. The only payment you might have to make on a zero-balance HELOC is an annual fee.  Some lenders charge them (whether you have a balance or not) and some don't.  They're not much though ($50-75 per year on average).

@Megan Clancy - your understanding is correct. Its an open line of credit. You dont have to pay anything unless you use it. The LOC itself is valid for some time - 5/10 years. I believe bank should tell you rate of interest upfront which is not fixed for entire duration but for some years - 5/10 years. No usage means no payment apart from maintenance fees. if a bank is telling you otherwise, stop talking to them and look around

@Megan Clancy

If a bank is charging you for anything other than maintenance fees on a HELOC, they are being shady and please share the intel.

It's good that you're posting on BP to double check with everyone, better safe than sorry.

HELOCs are especially awesome in rapidly appreciating markets where your investment properties can become leveraged piggy banks.

@Kimberly N. & @Ray Lai - thanks for the insight!
Do you happen to have any tips for selecting one / requirements when you chat with lenders from your experience?
I am new to HELOCs as well and trying to avoid doing something incredibly stupid.
@Megan Clancy - I have argued with so many lenders it's shocking. There are a handful of GREAT ones. And, those ones I have chased even when they leave industry.
Your lender's sheer ignorance / inability to listen would be one of the reasons I'd want to bail on the loan myself.

You pay interest on your balance......think of it like a credit card where you basically put your house equity up as collateral. If you have zero balance the bank has nothing to collect interest on. If they are charging you other fees etc, time to find another bank

We just applied for a LOC on a rental property we own free and clear. Capital One is offering 30 year LOC at 4%. Its great for properties you own free and clear. I dont plan to use the LOC except to buy properties, then we will refi them out.

@Alice K.

Yes, make sure to shop around between the big banks and your local credit unions. It's surprising that people don't shop around as lenders treat loans differently depending on whether they are flush with cash, or needing deposits to satisfy their ratios. Timing changes things a lot.

This is a great article that you must read before you get one:

http://guides.wsj.com/personal-finance/buying-a-ho...

It's good to have a local mentor as you can just ask them which lender they used and why. For me, I'd rather get a lower interest rate at only 75% of the home's value, rather than a higher one at 80%, but there are too many variables to make blanket recommendations. 

Be wary of small lenders that try to tack on hidden fees if you don't need to access the LOC other than the basic maintenance fee.

@Ray Lai the bank offering the HELOC wasn't the one telling me I had to make payments if I didn't use it (I double-checked with the actual HELOC provider for the specific terms), that was a different loan officer from another bank that didn't even offer HELOCs. He was trying to convince me to go with his company's loan over the HELOC I guess by trying to scare me, he also kept trying to tell me how dangerous variable interest rates are (I know there is an added risk with variable rates, but I've factored it into my calculations). It seemed like he was desperate to keep my business so he turned to using fear tactics to pressure me into dropping the HELOC and going with his loan.

@Alice K. I second Ray's advice about finding a mentor/trusted contact and using their lenders if possible. through my loan search, my agent (who is also an investor) referred me to his preferred lender, and although he didn't offer a HELOC which was specifically what I wanted, he was super nice and very upfront with me. He asked what I wanted the loan for and when I explained my intentions, he agreed that a HELOC was the best option for my purposes, despite him not getting a commission for advising me that way. I was impressed by this quite a bit, especially given the above experience with the above-mentioned lender. My agent's lender took the time to listen to exactly what I want and bowed out when he realized he couldn't help me instead of trying to sell me on his product anyway. To me, that said alot about his character and even though he wasn't the guy for this job, you can bet he'll be the first person I call when I'm ready to refinance and pull my money out to pay off the HELOC

@Alice K I was referred to this bank by the credit union where I have banked for years. They didn't do HELOC loans but the loan officer referred me to his friend who has had a lot of experience with them. I am pleased I went local. Rates are competitive & I have a real person I can go see face to face with any & all questions. Hope this helps!

How can you male an interest payment on a 0 balance?

What's 5% of 0?

Thanks for the advice @Ray Lai !
Super helpful and I completely agree with the lower down payment in your example.

I have a HELOC from Bank of America and in order to get a lower interest rate, they required that I take out the HELOC for 3 months and pay interest on it during that time. I could have avoided this had I gone with the slightly higher rate. Then I'm able to put it back and pay no interest. Could they have been asking you to do something like that? I think they just wanted to collect 3 months of interest so they were getting paid something, lol.

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