Question about Terms of HELOC

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Question about Terms of HELOC

Paul Ellington
Leesburg, VA · Member since 2019 · 34 posts · 19 votes

My wife and I are scheduled to close on a HELOC this upcoming week and throughout the process banks advertised interest only payments during the draw/advancement period of 10 years. When I received the final paperwork I noticed my minimum monthly payment was "the greater of $100 or the accrued finance charge, plus any fees and amounts past due." I interpret this to mean I owe $100/mo. regardless of whether I use it or not and that's in addition to the $100 annual fee that is waived if I accumulate over 100 dollars in interest over the year. My question to anyone with experience is, Is this a normal term for a HELOC or are there banks that will allow me to pay nothing unless I'm using the HELOC? I called around to roughly 10 banks to find one that offers a HELOC on an investment property and I'm wondering if that's why the terms are not what I originally anticipated. Any help would be appreciated and for what it's worth I think we will still close because at the current rate if I draw 25k out of the HELOC my monthly payment will be roughly $100 so I can then deploy the 25k and at least feel like my monthly payment isn't a waste. I'm hoping to use this money plus personal capital to buy and fix a house to later refinance (BRRRR) and repay what I borrowed on the HELOC. For $100/month having 25k to invest doesn't seem bad at all but someone reading this may disagree and I'd love to hear any opinions. Thanks!

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Kyle J.
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
6y

@Paul Ellington If I understand your question correctly, it sounds like you’re asking whether or not you’ll have to pay $100/month even if you have a zero balance. If so, then I’d say the answer to that would be no.

Granted I haven't read all the disclosures for your HELOC loan, and you only included a very small excerpt from part of one line. However, I do know a couple things that make me fairly confident of my answer.

Aside from something like a small annual fee (which you've already said is $100/year), one of the main benefits of HELOCs is that if you don't use them you don't have to pay. So it would be extremely uncommon to have to pay as much as $100/month when you a zero balance. In fact, I've never heard of a lender charging HELOC fees like that.

On the other hand, it is common for lenders to require a $100/month minimum monthly payment when you have a balance on your HELOC. In fact, I just took a look at the disclosures from one of my own HELOCs and that is exactly what it requires.

But when I don’t use them, I don’t pay anything. And I’m sure if you don’t use yours, you won’t have to either. 

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  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    6y

    @Paul Ellington If I understand your question correctly, it sounds like you’re asking whether or not you’ll have to pay $100/month even if you have a zero balance. If so, then I’d say the answer to that would be no.

    Granted I haven't read all the disclosures for your HELOC loan, and you only included a very small excerpt from part of one line. However, I do know a couple things that make me fairly confident of my answer.

    Aside from something like a small annual fee (which you've already said is $100/year), one of the main benefits of HELOCs is that if you don't use them you don't have to pay. So it would be extremely uncommon to have to pay as much as $100/month when you a zero balance. In fact, I've never heard of a lender charging HELOC fees like that.

    On the other hand, it is common for lenders to require a $100/month minimum monthly payment when you have a balance on your HELOC. In fact, I just took a look at the disclosures from one of my own HELOCs and that is exactly what it requires.

    But when I don’t use them, I don’t pay anything. And I’m sure if you don’t use yours, you won’t have to either. 

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  • Paul Ellington
    OP
    Leesburg, VA · Member since 2019 · 34 posts · 19 votes
    6y

    @Kyle J. Thank you so much for the detailed answer.  That makes total sense and I think you must be right the way I read it now.  If you don't mind reading this as it's the entire minimum payment portion of the contract but I am hopeful you're right and will keep you updated on this once I close on Tuesday. 

    "MINIMUM PAYMENT. Each billing statement we send you will identify a minimum monthly payment amount that you must pay. During the Advance Period (including any extension thereof), your minimum monthly payment will be the greater of $100.00 or the accrued finance charge, plus any fees and amounts past due, rounded up to the nearest $0.01."

    Thanks again, I will reach out to PenFed on Monday to clarify and with closing on Tuesday hope to be purchasing another rental soon! 

    Gratefully,

    Paul

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  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    6y

    Regarding this language: "MINIMUM PAYMENT. Each billing statement we send you will identify a minimum monthly payment amount that you must pay. During the Advance Period (including any extension thereof), your minimum monthly payment will be the greater of $100.00 or the accrued finance charge, plus any fees and amounts past due, rounded up to the nearest $0.01.", if you're not using the HELOC, there wouldn't be any "Advance". (They also wouldn't be sending you any billing statements.)

    So yes, after reading this, I still don't think there would be any $100/month charge if you had a zero balance. I'm sure your loan officer would easily be able to clarify this for you though.

    1Reply
  • Paul Ellington
    OP
    Leesburg, VA · Member since 2019 · 34 posts · 19 votes
    6y

    Thank you again for taking the time to read that!  I now see what you mean in terms of an "Advance" that would then require a minimum payment.  We close Tuesday morning and this is the first time having any type of equity line on a property so I wasn't sure what was normal.  I still plan to call my loan officer tomorrow but am very grateful for your help.

    Cheers,

    Paul

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  • Paul Ellington
    OP
    Leesburg, VA · Member since 2019 · 34 posts · 19 votes
    6y

    Update: @Kyle J. we closed on our HELOC yesterday and got notification today that it is finalized. We don't have a monthly payment due unless we draw on it like you said. Thank you again for the information

    1Reply
  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    6y

    @Paul Ellington Glad to hear it worked out and congrats on closing on your HELOC. :)

    1Reply
  • Ryan Kwong
    Member since 2021 · 2 posts · 0 votes
    5y

    Just wondering after a year did this hold true? Did you end up paying $100 a month? I have a feeling I'm using the same company for the HELOC and saw the language on my end too.

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  • Paul Ellington
    OP
    Leesburg, VA · Member since 2019 · 34 posts · 19 votes
    5y

    Hi @Ryan Kwong it has been great. I pay no fee on a monthly basis unless I draw on the HELOC so it's free to maintain and keep open until I draw on it. The language was confusing but I was pleasantly surprised. Best of luck with your HELOC!

    1Reply
  • Ryan Kwong
    Member since 2021 · 2 posts · 0 votes
    5y

    @Paul Ellington appreciate the feedback! Yeah I literally searched that part of the clause on google and it came with one result, your post. Can’t wait, it’s good to have a peace of mind with a line of credit! Thanks again

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