HELOC terms from my local credit union. Any feedback?

Question

Hello all,

A real estate rookie here in the midst of a HELOC application at a local credit union. I've used this credit union before for other things and they are very reputable. There is something in the HELOC terms that I'm scratching my head about though and thought I'd look here for feedback. Here are the basic terms of the HELOC that I've been approved for:

• "This loan has a variable interest rate, which is determined by the Wall Street Journal Prime Rate plus a margin. Your rate and margin will be determined by your loan to value and credit score. This rate may change monthly with a floor of 5.50% and a ceiling of 18%. The minimum monthly payment is 1% of the outstanding balance."

The 1% monthly payment is what I am questioning.  Is this normal?  I assumed our monthly payment would just be based on the HELOC rate?  So if the rate is 6% and we draw $30k, our monthly interest only payment would be $30,000 x 6% divided by 12 months = $150

Paying 1% would double that payment to $300.

This is my first ever HELOC and not sure what the standards look like.  Should I consider this or find a better one?

Thank you in advance!John

Andrew Freed · Answer

@John Michael - Yes usually you have the option of the first 10 years being interest only or 1% of the loan is the minimum payment. Always go with the interest only option... HELOCs are incredibly powerful when it comes to DTI. When you go for loans and have an outstanding balance on your HELOC, the loan company holds the minimum payment (e.g. the interest only payment) against you rather than principal + interest. As a result, your DTI looks a lot sexier to lenders even if you have a large balance on your HELOC. The 1% of the loan requirement would hurt your DTI more since it involves principal. If you are looking to scale, I would advise you to look for another HELOC company that offers interest only payments for the first 10 years to reduce the negative impact on your DTI calculation. Also, it allows more financial flexibility.

Luisa Trigo · Answer

@John Michael I spoke to Together Credit Union they're in 48 states except Alaska and HI. They have an intro rate 2.99% first 12 months then variable. 10 yr draw period interest only payments. This is what I've found to be the best for St. Louis MO thus far. Wonder what they're offering in your area.

Sam Yin · Answer

@John Michael

Just completed mine yesterday.  It took about 3 weeks. There is a 25k initial draw. No biggie.  I paid it today, paying a whopping 1 day of interest.

It's from a local credit union.  Terms was not the best, as I shopped several places. But the terms are better than most.

Terms:

Rate lock (prime + 0.5%) at 6% for first 5 years. Then adjustable at prime + 0.5 for the next 5 years. Finally,  PITI after year ten, amortized for 30yrs.

They also offer a similar/traditional term like yours as well.

Keep shopping. You will find one that will meet your needs.

Trent Reeve · Answer

i just finished mine. im also interest only with rate at Prime + .25%. i tried Navy Federal CU, but the best rates was a local CU in Georgia.

John Michael · Answer

Hi Luisa,I'm in the Orlando area.  It has been suggested numerous times here as well as on YouTube to first go to local credit unions for the best deals so I've started down that path.  If I continue to find terms like these that I'm not happy about, I'll then move to the bigger banks next.  It's funny how I've probably watched over 200 BiggerPockets videos and other investement channels and the HELOC terms I describe above were never mentioned.  It's true that you won't actually learn until you start doing it for real.  Best of luck!

Luisa Trigo · Answer

@John Michael Hello, where are you located and looking for HELOC? I'm in the same boat shopping around for a HELOC right locally in St. Louis MO. I've seen good options at First Bank and PNC. They're showing better terms than the local credit unions thus far.

John Michael · Answer

Thanks for the response Oliver, very helpful.  I contacted another local credit union and liked all their terms except that they require a minimum $10,000 draw after closing.  Not a fan of that idea either, I'd rather use the money when I want to, not be required to take out funds.  The search continues today.

Oliver Geppert · Answer

Hi John - the loan payback terms can vary a bit on HELOCS. My business partner's HELOC is an interest only payment whereas mine is similar to what your credit union is offering (minimum monthly payment = 1% of outstanding balance).

I looked high/low for a lender that offered HELOCs on investment property and this particular credit union is the only one that did so I'm ok with the terms but it can't hurt to look around for other options.

HELOC terms from my local credit union. Any feedback?

HELOC terms from my local credit union. Any feedback?

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