Am I making a HELOC Mistake?

Question

Hi there - I thought I was all set to start my investment journey before I spoke with my financial adviser yesterday. Now, I'm confused and could use some help.

Here's the sitch:

Before I discovered Bigger Pockets, I was working on paying off my house and building up my emergency fund. My husband and I owe just under $23K on our personal house and have $5K in our emergency savings with a goal of getting to about $20K.

Then, I started reading all of the books and got excited about the BRRRR strategy and decided to take out a HELOC. I found a $112K HELOC through Third Federal at 1.15% under prime with a 10 year borrow period and a 30 year pay back period. I have an appointment to sign the paperwork on Saturday, but I'm getting cold feet!

So, the question is - do I cancel my appointment, pay off my house (at a 3.57% rate) and fill up my emergency fund - or do I move forward with the HELOC (which requires me to roll my remaining mortgage into it) and start working on finding a deal that I can cash out refinance in the next 9-12 months?

I appreciate any advice!

Larry Turowski · Answer

@Bevin Morgan There is little downside to getting a HELOC for someone who is disciplined with money.  There are generally no closing costs, you'll pay off you mortgage, shifting the $23K remaining as a draw on your HELOC.  You can still pay that off if you want.  And you'll have liquidity at your fingertips for investment opportunities or emergencies.  In fact, your HELOC is so liquid I'd take your $5K in emergency funds to pay down the balance to $18K.  You can always take it back in as easily as you could withdraw the $5K from your savings account.

Chris T. · Answer

Keep your HELOC. If you don't draw on it, you don't pay interest. Worse case, it's a very minimum costs to have access to it.

I'm not sure if you're paying extra towards your principal, but if you're, I would stop. And divert the extra funds into your emergency fund instead.

You've a very low cost mortgage. Keep it as long as you can.