Investor · Summerfield, NC · Member since 2016 · 11 posts · 5 votes
I'm thinking about getting a HELOC to pay my mortgage off. I hear it can cut down on the time it would take to pay it down. Can anybody give me the pros and cons of doing this. I'm not sure about doing this and would any in put from you guys. That's Pat
Not sure I get it. A HELOC is a second position mortgage. Is your intent to get a HELOC to pay off the first position mortgage? Why not just refi into a better rate/term loan?
Not sure I get it. A HELOC is a second position mortgage. Is your intent to get a HELOC to pay off the first position mortgage? Why not just refi into a better rate/term loan?
Thanks for responding Chris. I guess I should've gave more details, so Here it goes.
I have three Rentals that I had bought in 2007 before the crash. I refied them in 2013 with a lower interest rate of 4.25% on all three with a 30 yr fix. For the passed 10 years I have been paying the mortgages and having a positive cash flow on all of them. I'm wanting to find a way to pay them off more quickly so I can use the equity to purchase more houses. I'm looking to retire from the Fire Dept in about 6 years. I was thinking of using my 457K to payoff all three houses so I could buy more real estate. By doing that I will take a 25% hit in taxes by withdrawing that money(Ouch).
Doing some research I've discovered HELOC's. With my research there are some things I don't like about HELOC's. Some people would say to use it like a checking account and deposit your paycheck in it to pay bills. I'm not sure I like that idea. I keep my business(rentals) in a separate checking account from my personnel checking. That is how I like things. Once I payoff a mortgage with the HELOC, can't I just use the HELOC like a credit card to payoff it off out of my business account? I've talked to my accountant and she would rather I do it that way instead.
I hope this gives you guys a better understanding. Any input on HELOC's would be helpful. Pat
First of all, thanks for your public service. I truly appreciate what fire/EMS/police provide for my/our community.
I think you answered some of your own questions. The key is to only enter into transactions you are comfortable with. There is no wrong answer, except the answer(s) that causes you grief or worry.
First, banks are happy to provide a HELOC because it is secured against your personal residence. Generally a HELOC is no cost to the homeowner. If there is a $0 balance, there is generally no fee or cost. So from an access to capital standpoint, a HELOC is a very worthwhile instrument. It's there if and when you need it. So for that reason, get a HELOC even if you maintain a $0 balance initially.
Your accountant has one idea that may not be consistent with your comfort zone. It's good to get all options, though, so organizing and writing down the options is a good idea.
I'd avoid taking any tax related "hit" until (collectively) we get clarity on "what the hell is going on..." With the looming administration changes regarding taxes, it may be prudent to discuss options with your accountant.
@Patrick Smith one of the easiest and least painful ways to pay down a fixed rate mortgage is to make 2 payments per month. Take your current monthly payment and split it... Without getting into the weeds, this strategy will actually cut your actual interest portion of your payments over the long haul. That is because you are actually paying your principle faster down faster with an additional payment over the 1 year time span. Its a little hard to explain, but use a standard mortgage payment calculator and input your numbers. You should see an acceleration in your principle payments as the years and months go out.
If you decide to go down the HELOC road, you are correct. If you use a HELOC to pay off your fixed rate mortgage and then pay off the HELOC with accelerated payments, in the end you would have a debt free property with a full HELOC to use as you please. Basically the benefit is to leverage the difference between the interest rates of the fixed rate mortgage vs the lower adjustable rate HELOC, and using that delta to pay down the debt as fast as possible.
Arlen Chou can you think of anything negative about getting a HELOC? I'm pretty responsible with money so I don't see myself buying a corvette with it. My credit score runs between 780 and 800. Thanks Pat
Patrick Smith Would the HELOC have a higher interest rate than the existing 4.25% 30-year mortgages on the three rentals? If so, it would seem counterintuitive to use higher rate debt to pay down lower rate debt.
If you are aiming to pull the HELOC from your primary residence to pay down mortgages on those rentals, have you considered just keeping the rentals as-is and using the HELOC funds to then acquire additional rentals?
@Patrick Smith it really depends on where you think interest rates will go. The general thought is that interest rates will go up in the near future. The big question is how far will it go up and how fast. In your case you have to decide if you think the HELOC rate you can get will catch up and pass your existing fixed rate mortgage. Obviously the closer the 2 numbers the more dangerous the switch. If the HELOC rate does go past your 4.25% rate, you are in trouble and you will not be able to get that fixed rate back.
Definitely shop around for the best HELOC rate you can find. I have a large HELOC at prime minus 1%. So my current rate is 2.65%. Moving away from a fixed rate of 4.25% made sense for me. I feel it will take a while to for the variable rate to catch up to my previous fixed rate. However, I did also have HELOC offers that were around the 3% rate. For me, I would probably not have made the switch with that spread.
There is an outside chance that the bank could cancel your HELOC down the road. I have been told this can happen, but I have never met anybody that has had to deal with that issue. But again, I have not had a long relationship with HELOC investing so please take this with a grain of salt
Good luck to you which ever direction you decide to go.