HELOC terms from my local credit union. Any feedback?

[John Michael]

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]

@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.