I haven't had one for a while but when I did, it did function in a manner typical of a business line of credit. The borrower is given a credit facility (max amount) to draw against. There's an available draw down period of some number of years (mine was 10) and the balance at that point became fixed (no further draws) and was amortized to payoff over 20 more years.

As a line of credit, the drawdown was at the borrower's option and amounts could be repaid (to reduce the outstanding balance) at any time. Or not.

I believe the spread on the index is fixed as one of the unchangeable loan terms when the arrangements are finalized.

I've never heard of a mortgage broker getting involved with a home equity line of credit. I suspect they're never involved - a mortgage broker's compensation depends on the amount of a loan, loan fees and the interest rates. For a line of credit, there is no loan at all until the borrower does a draw down - that could be years or months later. I personally won't deal with mortage brokers anyway - it's not a segment of the financial world known for having characters of high integrity- and the response you got about "I just refer people to a credit union" is evasive and perhaps not very forthcoming as far as the truth is concerned.

I also don't think much of credit unions for borrowing either. Ones I've dealt with have been amateurish operations, third-rate banks often with not competitive loan rates. Except sometimes for car loans.

You could always do a refi for your first mortgage. If you do, be sure to spend the proceeds on the house or repay what's unused, so that interest is deductible. Presuming you're under the total mortgage amount limit.

Try contacting a few lenders directly and see what you find out. Try local and virtual ones too (like Rocket Mortgage).

I believe the spread on the index is fixed as one of the unchangeable loan terms when the arrangements are finalized.

Yes, they finally explained this to me, but by that point, I was a little fed up with that taking a month to be confirmed for me.

Mr. Fudd, you are knowledgeable and I appreciate your perspective. I will say credit unions are great to deal with for some things. I don't finance my vehicles anymore but I got my only 2 car loans from them, and the rates were great. I have known people who got the best mortgage rate they could find anywhere at Navy, it is the largest and probably has more power to offer low rates than some smaller credit unions. However, if you compared it to US banks, it would rank something like 33rd. So, a mid to large sized regional bank. When I needed a trust account for my father, Navy wasted my time and botched it. (you might remember my other message about having to be co-trustee for my dad, and executor for my Mom after she died) A branch manager said as long as I was a member, I could be a co-trustee for the account and it wouldn't matter that my father hadn't joined. Nope, legal came back 3 days later saying I'd have to figure out how to get my father to join. THEN they would take a few more days to review the very standard trust document! Infuriating! This was an emergency situation where I was having to start paying his bills out of my own checking account! It was inexcusable that such a very basic fact of the process wasn't known or readily verifiable to the branch manager. A top ten US commercial bank handled what I needed completely professionally and relatively quickly...legal department reviewed the trust documents w/in 2 business days, and a branch appointment was scheduled the next day. Navy literally had me schedule a second branch appointment and drive to another county, just to tell me they couldn't set up the account. Why not just tell me on the phone?

(that isn't to say those are all great either...another top ten US bank kept me waiting for 2 hours, over 2 visits, trying to close my Mom's account when I had the testamentary letter on hand from the probate court!!!)

I'm a real estate agent, and I've been noticing fewer lenders offer HELOC loans. I'm not sure exactly why, but I'm assuming it's because they can't make money on them. I've also noticed larger banks have imposed some restrictions on them. For example, if you open the HELOC, then you need to keep it open for at least 5 years or you'll need to pay off some of the bank's expenses such as the appraisal fee.

That's interesting. My general (not from recent) impression is that banks prefer home equity lines of credit. The interest rates are a good bit higher than for mortgages, there's often more customer equity for security, and they have floating rates. So unlike fixed mortgages, market rate changes over time are reflected in the rate charged customers.

I agree with Rachel on this one. It seems like HELOCs are not being promoted as much by the big banks as they used to. Credit Unions, being nominally "non-profit", presumably don't need to make as much money on their loan products. I was VERY surprised my mortgage banker, who used to be a principal at one of the largest originators in the DC area before he left for a smaller rival to gain a partnership, recommended a credit union as the best place to get one. And in fact, I looked through my emails from him going to back to the early 2000s, he used to send emails saying he could originate HELOCs. Now he doesn't bother with them.

FWIW Tower continues to handle everything in a much more responsive and clear manner than Navy FCU, including giving me a solid date in early April when my loan will get underwriter review. They have also clearly stated what the margin will be for the life of the loan. They also disclose in clear language that if I close out loan before 2 years, I have to pay the fees. Which is totally reasonable since I could pay as little as $50 a month on the loan if I don't draw.

As I said, my equity line of credit experience was some years ago so I'm not current.

In the last 5 years, for two car purchases and one home purchase, the credit union I have an account with (for a non-bank account reason that doesn't matter) had uncompetitive loan rates. For the two cars, I did one through USAA and the other directly from the car manufacturer's finance division. For the mortgage, I used Rocket Mortgage. Each offered very good pricing at the time and excellent experiences.

On the occasions I've had to deal directly with my current credit union, I've been underwhelmed with the knowledge and capabilities of the people I've spoken to. Dealings in years gone by with other credit unions were not different. Maybe just bad luck and others are better, I don't know.

As with anything, YMMV. I have my mortgage through a local credit union, and the services was phenomenol. I've said this before -- no way would I ever gotten approved for this mortgage by a big box bank or mortgage lending company. The mortgage officer at the CU took my whole picture into account and used professional judgement rather than relying on an algorithim and rubber stamping it denied.

I also bank at the local credit union and a local independent bank. I've no complaint whatsoever about any of them.

I had a line of credit some years ago, and the bank froze it when the market tanked. I think I used it to buy a car, since interest rates were lower than car loan rates, and I was going to pay it off in a couple years.

When I’m ready to buy my next home, (we are not selling our first home), I’ll be using a “margin loan”, set up by our financial advisor. In simple terms, it’s a loan using our investments as collateral. Everyone’s financials are different, but this will allow us not to liquidate anything. Our son has just done this, taking $120k, for a remodel.

I built and closed on a new home 1.5 years ago, and used my HELOC for funds until my previous house closed. The time gap was about 3 weeks. I've shared this strategy for clients who have the assets and income to consider this for a new purchase. Note that lenders will not underwrite a HELOC while your house is on the market, so you need to have this in place before you list. At the end of the day, this is one of the least expensive ways to tap money since most lenders do not change any (or minimal) fees.

Perhaps some of our different experiences are due to regional variations. And you may remember, that HELOC interest is no longer tax deductible if it is used for purposes other than improving the property used for collateral. Many of us remember when you could deduct interest regardless of how these funds were used.

"Many of us remember when you could deduct interest regardless of how these funds were used."

I'm not sure that was ever the case.

"I’ll be using a “margin loan”,"

If you're referring to a margin loan on securities in a brokerage account, be careful. The margin rates are usually quite unfavorable compared to mortgage rates.

@Elmer J Fudd, yes indeed when HELOCs came out, the interest was fully tax deductible. And they were marketed that way.

There is nothing special about home equity lines of credit. They're nothing more than a different flavor of second mortgage. Second mortgages were very common at one time, perhaps now not so and maybe even not done. For a second structured as a fixed amount, the loan proceeds were distributed up front. A line of credit, which as I said above is common for business loans, is a facility where a maximum amount of loan is established and the borrower initiates loan disbursements when and for amounts they wish to receive. Up to the maximum.

I believe today's tax deduction rule is unchanged from how it's been over the years - when the total amounts of a loan on a personal residence increases in what's called a "cash out" situation (whether if because of getting a new line of credit secondary borrowing or refinancing a first mortgage) if the increase in loan amount isn't spent on improvements for the house, interest on the loan increment isn't deductible.

Simple example - You have a house worth 1000 and after 15 years of loan payments the mortgage is 400. Whether you refi the first and get a new loan of 500, or get a home equity loan as a second mortgage of 100 that you draw out immediately, if the 100 cash out isn't spent on improvements for the house, then only 400/500ths, or 80 percent, of the mortgage/loan payments are deductible. Interest on the additional 100 loan balance is not.

Apparently the change was in 2018.

https://lendedu.com/blog/are-home-equity-loans-tax-deductible/

Congress passed a new law in December 2017, however, that changed the way the IRS considers home equity loans and HELOCs. So if you take out a home equity loan or HELOC to consolidate debt, pay off credit card debt, buy a car, pay for medical expenses, go on vacation, or pay for college, the interest is no longer tax deductible.

I didn't even think about having a HELOC at the time but I remember this change being discussed in personal finance media.

I've had HELOCs on all my homes since the 1980's. In many jurisdictions, they cost practically nothing to maintain and provide instant cash in large quantities. No need to liquidate assets for emergencies.

Unless one is profligate, I can't see any disadvantages.

Just my 2 cents...

Banks largely started moving away from HELOC's when Glass-Steagall was repealed in 1999. Banks make more profit and have less inflation risks when interacting with the secondary mortgage market.

In other words banks can make more money selling mortgages on the secondary market than they do from keeping a mortgage in house. Also, because they can rebuy those mortgages discounted to present values using current rates, they can repurchase those same loans in the event that interest rates increase and synthetically adjust them to the current rates. That makes mortgages safer and more profitable than HELOC's. After the 2008 fiasco, Dodd Frank increased the percentage of originated loans the bank must hold and so there is even less reason for them to do HELOC's than there was before, as every dollar in a HELOC is several dollars in mortgages that the bank must forego.

For various reasons the credit unions don't interact with the secondary mortgage market as easily and therefore are much more enthusiastic about HELOC's (a.k.a. HELOC's are more profitable).

---

It is important to note that mortgage interest of any kind is really only deductible to the extent that it increases itemized deductions over the standard deduction. The problem being, with a $10,000 SALT limit and a Married Filing Jointly standard deduction of $25,900, for most Americans neither primary or secondary mortgages are actually deductible.

@bry911, thank you for this summary.

I don't agree with the preceding comments in several respects. It contradicts itself, for example - it can't be both advantageous to originate and then sell mortgages, and also to buy them on the open market. Mortgages are traded at a form of present value in both cases, there's no arbitrage opportunity that I know of.

Banks like floating rate loans of any kind, which is why they're typically offered at lower rates than fixed loans. They don't need to worry about having committed money at a fixed rate when market conditions change, when an increase would cause them to pay more on deposits. more for amounts they themselves borrow and other sources of funds.

It varies with location but in many parts of the US, the federal standard deduction amount is itself no obstacle relative to having enough expenses to itemize when buying a home. If I sold you my garage, your interest deduction for the mortage on its own would take you very close to that amount. I wouldn't do it but, in my area, as well as so many others, there's nothing under 7 digits available to buy. Finance that at 80% and even before property taxes, one is well over the bar. Sure, the net deduction is the amount in excess of the standard deduction but it's a low threshold for people gainfully employed and living on the coasts and populated booming metro areas in between.

"It varies with location but in many parts of the US, the federal standard deduction amount is itself no obstacle relative to having enough expenses to itemize when buying a home. If I sold you my garage, your interest deduction for the mortage on its own would take you very close to that amount. I wouldn't do it but, in my area, as well as so many others, there's nothing under 7 digits available to buy.Finance that at 80% and even before property taxes, one is well over the bar."

What?!? You deduct the interest in the year you pay it, and not all areas of the country are in the 7 digit sales price range. Not even close. The median sales price was a hair over $400,000 in February 2022, average $511,000. (source: Microsoft Word - newressales_auto_text.docx (census.gov))

bry911's assessment is on target. Using myself as an example, I paid somewhere in the $12K ballpark in mortgage interest last year -- nowhere near the $25,900 standard deduction, and I don't have enough other itemized deductions to take me above the standard deduction. Of course individual circumstances vary and of course there are people who have enough to itemize to get them above the standard, but I'd venture the number of Americans itemizing isn't as many as it used to be because of the recent tax reforms -- which means, in essence, mortage interest isn't deductible anymore if you're one of the millions who no longer itemize.

There are many, many places in the US where you can't buy a home for a 6 figure price. If your name suggests you're in Michigan, depending on where you are, you're may be in a rather low value and perhaps even depressed real estate area. The opposite is the case for where a lot of people live. The median sales price in my entire state (which includes a lot of lower and modest cost areas) is double or more the figure you cite. In nicer neighborhoods, keep your seat belt fastened. The numbers I've mentioned are accurate and ones I've experienced recently myself as have two of my kids.

A $700K mortgage, which buys very little without a large down payment in many parts of the US, will all by itself get the borrower close to $25K in itemized deductions. Without even considering property taxes. .

^^ No point to bicker over what's going on in my neck of the woods or yours or his or hers when all one has to do is refer to the census.gov data I sourced about the US median and average home sales prices last month.

Even better, refer to SOI Tax Stats — Tax Stats-at-a-Glance | Internal Revenue Service (irs.gov) In tax year 2018, only 11.4% of filers itemized their deductions; this is the year Tweety's tax reforms went into effect, changing the dollar amount of standard deduction.

{shrug}

I originally typed a thorough response here. However, rather than try to explain the mechanics of front-end spread, back-end spread, and servicing asset backed securities with unnecessary brevity, I will simply encourage people to look at one of the most researched and discussed banking topics in history and see for yourself.

"I originally typed a thorough response"

More than a few times in the past, you've had a curious practice of either making retroactive changes to your comments (based on what others have said subsequent to a post you've made) suggesting you'd said something other than what the original words said, and sometimes deleting posts altogether.

I saw the apparently now deleted comment in passing and it had something like "assume I had purchased your garage.....".

Let's continue along that line. If you had purchased my garage a few years ago, it happens that you would have to this point a significant paper gain because prices have been in a steady upward movement in my area for 15 years or more, year on year. If you'd made the purchase in the past year or two, you'd be ahead in an amount far in excess of the peanuts takeaway from the tax change making not all of your interest expense a reduction of income subject to tax.

Not all areas are booming but many are. In areas of thriving economic activity and growth, many millennials in well-paying white collar occupations struggle to buy real estate and many are able to do so only with money from family gifts or received through inheritance. I don't see this changing.

In other areas, local economies and real estate markets are moribund and for many of them and for many people, I do not see that changing either.

I didn't mean to start an argument, but lively, thought provoking discussions have always been a hallmark of gardenweb, back to the late 90s. ;-) And I would say this definitely is one.

I will share a funny lagniappe...when I asked whether the HELOC margin could change over the course of the loan...one processor, whose linkedin touted her "years of experience in mortgage originations"...said she'd "never been asked that question before"!

More than a few times in the past, you've had a curious practice of either making retroactive changes to your comments (based on what others have said subsequent to a post you've made) suggesting you'd said something other than what the original words said, and sometimes deleting posts altogether.

Just because you are curious... Sometimes, after taking the bait, I realize that anyone who would make such a ridiculous statement isn't really that interested in being right.

I think you proved the point when you noted, "If you had purchased my garage a few years ago, it happens that you would have to this point a significant paper gain because prices have been in a steady upward movement in my area for 15 years or more, year on year. If you'd made the purchase in the past year or two, you'd be ahead in an amount far in excess of the peanuts takeaway from the tax change making not all of your interest expense a reduction of income subject to tax."

The above statement has absolutely nothing at all to do with whether or not interest is deductible. It is just someone pivoting away from an argument they can't win into a completely unrelated point.

Moreover, it is a silly point... the inflation adjusted HPI return of San Francisco in the last 15 years (since you said 15 years or more) is 70%, while the inflation adjusted return in the Dow is 178% with DRIP and 94% cashing in the dividends. So yes, I could have a nice garage in your yard but I wouldn't be any better off even if I managed to talk you into paying the taxes.

I'll bet the children you teach are impressed with random stats and acronyms.

Knowledgeable adults, not so much.

Surely you know what a dividend reinvestment plan is and we have discussed the Home Price Index previously. I figured you would remember and no one else would really be interested.

Not sure how "knowledgeable" one can be when they don't know the basic metric used for the subject they are discussing, but... cool.

The profit of banks originating, aggregating, and servicing mortgages actually collapsed the global economy. How can someone then claim they are not profitable while claiming to be "knowledgeable?"

How can anyone take you seriously?

@davidrt28 (zone 7) - I am not sure if your original question was answered, but I will have a go.

The margin can change but the terms under which the margin can change and how it can change must be disclosed at signing. While relatively rare, the most common used to be a change in your credit worthiness. The loan documents would have margin adjustments for credit worthiness in the closing documents, so if your credit got worse so did your rate. Those were always rare in my region.

Today, banks rarely change the margin and instead give rate discounts. The loan will close at a higher rate with guaranteed discounts available, such as a discount for automatic withdrawal and auto deposit of a payroll check, etc.

I live and worked in the actual world where things are real and not academic or theoretical. I did just fine and always relished competitive proposal situations where my competition was smoke-blowing nincompoops who were all sizzle and no steak. Who recalled the old, trite saying "If you can't dazzle them with your brilliance, try to baffle them with your bull stuff". Not the word "stuff" in the original form. .

Bry,

Thanks, that was exactly my concern and why I started this thread.

In reading about HELOCs, I had read that in _some_ cases, the margin could change. So I didn't know why the first credit union I applied at didn't have a very clear disclosure of their loan's terms. The next one did. (-.5 margin, fixed...it would be higher, 0 or positive, if I had a less favorable LTV)

Absent further evidence, I can only wonder if the first credit union wanted to reserve the right to change it, but who knows.

@davidrt28 (zone 7) - I think there is still some miscommunication. They can't change the margin to an undisclosed amount. They can tell you the specific margins available and what conditions must be met to receive those margins, but they can't have you sign a loan with no published conditions or amounts and then change them anyway.

However, the above comes with a caveat. Regulations can't and don't keep up with attorneys and so it is theoretically possible that a bank has found a loophole, but I doubt your bank has. Odds are it is just a standard fixed margin given your current credit worthiness along with some discounts for various conditions.

I see you're still posting and deleting.

My comments were clear and unequivocal. Nothing more to say.

If you don't like the way the forum works then leave and go start your own. Until then quit whining.

I deleted a comment noting that you are trying to deflect from your very obvious ignorance with ad hominem attacks and deflections.

Again, you countered a post about the deductibility of mortgage interest by noting that your garage has appreciated more than most garages. You deflected away from the profitability of banks interacting with the secondary mortgage market by calling me an academic.

Your comments were absolutely clear and unequivocal deflections. This is just your MO. You are seriously pretending that the mortgage market collapsing and same home sales are not the real world. I deleted the post because I realized that everyone already knows who is right . There is no reason for me to point it out and the only thing you are going to do from here on out is pretend that I don't have real world experience because I decided to teach after retiring to be back in the U.S. I still spend more time consulting than I do teaching... but that is not real world to you.

Playground monitor has been notified.

Bry,

one more followup re: the original topic

I think there is still some miscommunication. They can't change the margin to an undisclosed amount. They can tell you the specific margins available and what conditions must be met to receive those margins, but they can't have you sign a loan with no published conditions or amounts and then change them anyway.

Yes and I guess whatever I would have signed on the final day when the loan was funded and executed, would have to spell everything out precisely. But what alarmed me was, any time I applied for a (fixed rate, obviously) normal, first mortgage - I have bought 2 houses in my life - or got a refinance on a first mortgage, you get some confirmation right away of the rate you are locking in. To me, the "margin" of a HELOC is the equivalent of a rate...it's the amount you are negotiating, since, obviously, the prime rate is beyond everyone's control. So I couldn't figure out why Navy (largest CU in the country) didn't send me a clear indication of the "margin rate", right away. Tower FCU (largest CU in Maryland) did.

I should also clarify, since the chronology might be confusing, my opening post was literally moments after applying at the 2nd credit union, but weeks after the first. So I might have made an assumption the 2nd also wouldn't give me an immediate margin confirmation, either. In fact, they did a day or so later. I had to ask at the first credit union, which led to the "nobody has ever asked that before" comment from them. I'm glad I followed my mortgage broker's/bankers advice (not sure which he actually is, I think the latter) and tried Tower, since my experience is proving to be better there.

@davidrt28 (zone 7) - I suspect it has to do with the size of Navy working against them.

While an oversimplification it useful to think of mortgage funding as a pool of money at a rate range looking for a loan, and HELOC funding as a loan looking for a pool of money at a rate range.

Because smaller credit unions fund fewer loans they may be more aware of the going rate for those pools of money, where a large credit union that funds many more loans may not be as aware of the particulars of those pools or more likely has more pools to keep up with.

I am aware that I am going to be attacked for the above statement, just as I was aware my earlier informed analysis would be attacked. I should really be better at ignoring those largely ad hominem attacks and apologize to you for not doing so.

David, the difference between a fixed rate mortgage and a HELOC is that the latter is a variable rate loan that flexes with an index as the basis and some margin as defined by the lender. If you want a fixed rate for your second mortgage, you should look at Home Equity Loans rather than Home Equity Lines of Credit (HELOC).

Rachel, I believe David is discussing the variability of the margin not the rate. He seemed concerned because Navy appeared to note the margin could change on the variable rate loan but didn't note how.

Yes, I understood that the rate changes with prime, why I stated "obviously, the prime rate is beyond everyone's control". I debated about a fixed home equity loan but the funny thing is, there's a not insignificant chance I will decide I want to do a smaller scope of renovation, and won't even need the HELOC. So given that I'm not sure what I want to do, the flexibility of the HELOC made sense. Finding 'members of the building trades' who seem worthwhile to deal with and trust, around here, is always a challenge. It's still very up in the air.

(I could start an entire separate thread about the renovations, eventually, in another forum)

@davidrt28 (zone 7) - Given the trajectory of interest rates it may make sense to get a fixed rate second mortgage and then pay the couple of hundred dollars to have it recast if you use less.