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For a home-owner with no debts, a good salary, credit score, etc.:

What terms would be optimal for future liquidity when obtaining a home equity line of credit (HELOC)?

The point is to obtain credit when it is not needed on the best terms available so that if there are future problems, such as loss of job or other changes in circumstances, the credit will still be available on the best terms.

Edit:

I specifically wonder in the case where the HELOC is the first mortgage and the LTV is under 50%

  • Before you go with this, check with your insurance company that they will not charge you more because there is (effectively) a mortgage on your house. – DJClayworth Apr 11 '14 at 13:37
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A typical HELOC offers a 10 year draw, and then 15 year amortization. You should get the lowest margin you can, mine is Prime-1.5%. You are right, the loan to value is what's important, but I'd read the fine print. Mine said that I needed to keep the property insured, in my name, and it needed to stay above $XX in value. My first and HELOC total less than 50% current value.

I agree that a HELOC is a good source of liquidity, as long as it's used wisely.

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If the purpose is liquidity, a Personal Line of Credit (PLOC) is much better than a Home Equity Line of Credit (HELOC).

If housing prices drop, and/or banks start to fail, government regulators may tell banks to stop lending on HELOCs. In 2008, many customers who thought they had $ 100,000 HELOCs suddenly found that they could not borrow against their HELOC.

If you need to move or refinance, you can use a PLOC to smooth out the resulting cash crunch. Whereas a HELOC needs to be paid-off and/or refinanced at the same time, making the cash crunch worse.

HELOCs tend to have higher initial costs. You might need to pay for an appraisal, for loan documents to be filed with your local government, for loan underwriting, and for a loan officer's commission. HELOCs also cost money to pay off, because more loan documents need to be filed with your local government.

PLOCs and HELOCs tend to have similar annual fees. $ 50/year is typical.

If you do wind up borrowing against the line of credit, HELOCs tend to have lower interest rates than PLOCs. A difference of 3 percentage points per year is typical for borrowers with excellent credit and substantial home equity. Plus, HELOC interest is tax-deductible for many borrowers. (This depends on the borrowers' residence(s), income, equity, loan amount, and other factors.)

  • I edited the question to be more specific about the HELOC. Would you change your answer based on this more specific scenario? My objective is to have a secured credit line with assets that are not as liquid (a home in this example) but where the loan is safe enough that any lender would be comfortable lending at the lowest available rates. – Nathan L Jul 6 '15 at 16:34
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It is doubtful you can do what you want, because HELOC loan agreements generally give the lender the right to freeze the line of credit at their discretion (as many people found out during the most recent recession). So there is a definite risk that if you lose your job, have credit problems, etc., your line will be frozen -- just when you want to draw on it.

You can of course attempt to negotiate that away, but I suspect you will have no luck doing so.

That aside, I would think you'd want a rate with the lowest margin above prime you can find, and with an interest-only payment requirement during the draw period. You might find it useful if the HELOC allows you to convert pieces of a balance to a fixed-rate loan. However, that's generally less useful than it may sound because such fixed-rate conversions are usually at a significantly higher rate than the HELOC.

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    Yes, HELOCs were frozen during the most recent recession because home values plummeted, but your employer isn't going to call the bank when you lose a job, nor will your credit score be affected if you don't suddenly start missing payments. I think you could improve this answer by focusing on loan to value ratios, etc. – Nathan L Apr 11 '14 at 2:51

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