Line of Credit

25 Replies

Me and my wife recently bought a new residence place for primary living. This is our first property

We are under conventional loan at 4.1% interest rate for 30 years. We dont want to keep paying for those many years cause of the interest it eats

We both want to get the loan wrap up pretty sooner. We have read about Line of credits options. We both have a good cashflow and definitely dont want to end up paying for 30 yrs.

Questions

1) Have anyone used LOC options for their primary mortgage?

2) Advantages/Disdvantages?

3) Anything we should lookout when going for such option?

Please share thoughts as both, me and my wife, are pretty new here

Sorry if this is a repetitive topic. I dont want to end up paying for that many years over my mortgage since I can easily pay some extra cash each month.

Does it make sense to pay up that extra money each month in Heloc or should I think of investing this extra money elsewhere (since my intention is to start with rental properties in some time down the line)?

We want to pay off our mortgage within 7-10 yrs but dont want to just wait in those 7-10 yrs. We want to start with rental properties as well.

Can anyone please advise how should we approach her. I am a beginner, any advise would help me in big way

When we bought our house we paid it off in 9 years. It was probably NOT a good idea, but interest rates were higher then. Instead of paying your loan off sooner, take that money and invest it. You should do better than 4.1%.

@Harpreet Walia is your thought to eliminate debt by taking out more debt to pay it off? Why would you want to use a LOC to pay off a mortgage already at a low int rate? Why not just pay one or two extra payment a year and knock off how ever many months/years that would take off the loan term? Perhaps I am misunderstanding..?

4.1% rate seems high to me.  Have you considered refinancing?  Rates are very low now. 

I don't know what your credit score is but I'm getting a 7 year ARM at 2.875 right now.

HELOC is a great way to finance new deals at a very low rate (3.75 to 4.25) rather than using higher rate loans (hard money etc...).

If you need a referral I have two good lenders/brokers.  Send me a message and I will pass them on to you.

-Joe

What's the hurry to pay the loan off so quickly? We will probably never see rates this low again. To keep things in perspective, normal interest rates are 6-8% if you look at the last 40 years. I believe in looking at your personal residence differently than investment property. If you feel more comfortable paying it off, do so but it'll be easier to do that by making principal payments over time. If you want a HELOC so you can use it for investment purposes, I'd wait till you have some equity and take one in 2nd position. As you pay the 1st down, you can always ask for increases on your line. Just my 2 cents....

Originally posted by @Scott Weaner :

When we bought our house we paid it off in 9 years. It was probably NOT a good idea, but interest rates were higher then. Instead of paying your loan off sooner, take that money and invest it. You should do better than 4.1%.

Thanks for your inputs Scott. So if you were in my situation, would you have invested the extra cash into other properties?

Originally posted by @Christopher Leon :

Harpreet Walia is your thought to eliminate debt by taking out more debt to pay it off? Why would you want to use a LOC to pay off a mortgage already at a low int rate? Why not just pay one or two extra payment a year and knock off how ever many months/years that would take off the loan term? Perhaps I am misunderstanding..?

Thanks Leon. This is what my confusion was. Should I pay extra now or should I not do it that aggressively. 

This is my first loan arrangements and as people are saying its pretty decent/low interest rate. You got it right. 

Originally posted by @Joe Kim :

4.1% rate seems high to me.  Have you considered refinancing?  Rates are very low now. 

I don't know what your credit score is but I'm getting a 7 year ARM at 2.875 right now.

HELOC is a great way to finance new deals at a very low rate (3.75 to 4.25) rather than using higher rate loans (hard money etc...).

If you need a referral I have two good lenders/brokers.  Send me a message and I will pass them on to you.

-Joe

 Thanks for inputs Joe.

This is a new construction properties/townhouses. These are still coming up. Since these are still under progress construction, banks are pretty stringent on giving out loans, let me know if this is not the case. 

Please do refer me those two lenders/brokers and I will check with this. My credit score is more towards excellent side. 

I will message you for lenders details. 

Originally posted by @Andreas Mirza:

What's the hurry to pay the loan off so quickly? We will probably never see rates this low again. To keep things in perspective, normal interest rates are 6-8% if you look at the last 40 years. I believe in looking at your personal residence differently than investment property. If you feel more comfortable paying it off, do so but it'll be easier to do that by making principal payments over time. If you want a HELOC so you can use it for investment purposes, I'd wait till you have some equity and take one in 2nd position. As you pay the 1st down, you can always ask for increases on your line. Just my 2 cents....

 Thanks Andrea. This is exactly why I kept my question/confusion here. I just dont want to put money away so aggressively, just because there is debt revolving around but wanted to see how can I invest that extra monthly cash anywhere. 

If you were in my situation, how would you have used that extra monthly payment on buying/rental other properties?

Thanks all for your inputs. For now, I think its best if I dont take decision on heloc/LOC at this point keeping interest rate in mind.

I will also try to refinance it to see it comes down to where it currently is. 

Please keep it coming. Helping me a lot

I think that people are afraid of debt. I still have a hard time convincing my wife that debt can be good. If I knew then what I know now, instead of paying off the mortgage I would have simply invested the extra in the stock market, as I was not investing in real estate then. 

Originally posted by @Harpreet Walia :

Me and my wife recently bought a new residence place for primary living. This is our first property

We are under conventional loan at 4.1% interest rate for 30 years. We dont want to keep paying for those many years cause of the interest it eats

We both want to get the loan wrap up pretty sooner. We have read about Line of credits options. We both have a good cashflow and definitely dont want to end up paying for 30 yrs.

Questions

1) Have anyone used LOC options for their primary mortgage?

2) Advantages/Disdvantages?

3) Anything we should lookout when going for such option?

Please share thoughts as both, me and my wife, are pretty new here

Harpreet, I'm not quite sure what you are trying to do. Are you asking whether you should get a HELOC in addition to the mortgage you have right now? If so, then it depends on how much equity you have in the property. If you financed at 95% of appraised value then no bank will give you additional lines of credit as you have no equity to secure the credit.

If you are asking whether you should REPLACE the mortgage you have with a HELOC, because HELOCs have lower rates, then you need to consider that the reason for those lower rates is that the rate is variable (i.e. it will go up when prime rates move). You could have achieved the same by choosing a variable rate mortgage rather than a fixed rate like you did.

Originally posted by @Scott Weaner :

I think that people are afraid of debt. I still have a hard time convincing my wife that debt can be good. If I knew then what I know now, instead of paying off the mortgage I would have simply invested the extra in the stock market, as I was not investing in real estate then. 

Thanks for sharing your experience/inputs here. I will look out for options to invest extra cash. My objective is to buy rental properties to cover my existing monthly cash flow. Lets see. 

@Harpreet Walia If I were in your situation I would leave your existing loan in place and I wouldn't worry about a HELOC until you've paid the existing loan down significantly. I used to be more comfortable with leverage but now that I have a wife and three kids I'm a lot more hesitant to put my primary residence at risk. Yes, you lose the advantage of leverage by not taking a HELOC out to use towards other property but the downside risk to me of even the possibility of losing my residence isn't worth it. I'm slowly and steadily paying off my residence and we won't touch the equity.

I would save the extra cash and establish an emergency fund (6 months of expenses) if you haven't done so. Once you've done that, save money for investing and allow it to accumulate until your ready to put it into something else. I understand the urge to invest right away but it's easy to get in trouble when you overleverage and things don't go the way you plan. There are so many different parts of RE to invest in and they require different dollar amounts and different levels of involvement. You'll find something that'll pique your interest....

@Harpreet Walia  

You might consider paying the minimum on your mortgage and invest the rest in real estate. While you may be able to refinance your home at a lower rate, you will end up paying $3,000 to $5,000 in closing costs that will eat away at your savings. Depending on the size of the mortgage and differential in interest rates, the numbers may or may not work. You may also be able to get a HELOC on the equity you do have in your recently purchased home, assuming you have some equity in it. Many bank will give you a HELOC on 90% of appraisal and a few that will do 100%.

Originally posted by @Daniel Foster :

@Harpreet Walia 

You might consider paying the minimum on your mortgage and invest the rest in real estate. While you may be able to refinance your home at a lower rate, you will end up paying $3,000 to $5,000 in closing costs that will eat away at your savings. Depending on the size of the mortgage and differential in interest rates, the numbers may or may not work. You may also be able to get a HELOC on the equity you do have in your recently purchased home, assuming you have some equity in it. Many bank will give you a HELOC on 90% of appraisal and a few that will do 100%.

Thanks Daniel. After everyone's suggestion, I think I can hold on to take HELOC. I will save enough monthly to get together another down payment for another property. In the meantime, I will search for potential properties in some areas.

Originally posted by @Andreas Mirza:

@Harpreet Walia If I were in your situation I would leave your existing loan in place and I wouldn't worry about a HELOC until you've paid the existing loan down significantly. I used to be more comfortable with leverage but now that I have a wife and three kids I'm a lot more hesitant to put my primary residence at risk. Yes, you lose the advantage of leverage by not taking a HELOC out to use towards other property but the downside risk to me of even the possibility of losing my residence isn't worth it. I'm slowly and steadily paying off my residence and we won't touch the equity.

I would save the extra cash and establish an emergency fund (6 months of expenses) if you haven't done so. Once you've done that, save money for investing and allow it to accumulate until your ready to put it into something else. I understand the urge to invest right away but it's easy to get in trouble when you overleverage and things don't go the way you plan. There are so many different parts of RE to invest in and they require different dollar amounts and different levels of involvement. You'll find something that'll pique your interest....

 Thanks again Andrea. I can wait for bringing down the principal slowly and steadily but we dont want to wait too long, before I could invest in other properties. 

Me and my wife still dont have kids. We dont want to make any decision in hurry but we think we can take a bit risk at this time of life (she is 28 and I am 31). This might be wrong but I think its much easy to think about investing at this stage than later. 

We have already arranged for emergency fund for 8 months. We only started investing when after that. 

Originally posted by @Andrew S. :
Originally posted by @Harpreet Walia:

Me and my wife recently bought a new residence place for primary living. This is our first property

We are under conventional loan at 4.1% interest rate for 30 years. We dont want to keep paying for those many years cause of the interest it eats

We both want to get the loan wrap up pretty sooner. We have read about Line of credits options. We both have a good cashflow and definitely dont want to end up paying for 30 yrs.

Questions

1) Have anyone used LOC options for their primary mortgage?

2) Advantages/Disdvantages?

3) Anything we should lookout when going for such option?

Please share thoughts as both, me and my wife, are pretty new here

Harpreet, I'm not quite sure what you are trying to do. Are you asking whether you should get a HELOC in addition to the mortgage you have right now? If so, then it depends on how much equity you have in the property. If you financed at 95% of appraised value then no bank will give you additional lines of credit as you have no equity to secure the credit.

If you are asking whether you should REPLACE the mortgage you have with a HELOC, because HELOCs have lower rates, then you need to consider that the reason for those lower rates is that the rate is variable (i.e. it will go up when prime rates move). You could have achieved the same by choosing a variable rate mortgage rather than a fixed rate like you did.

Thanks to chime in Andrew. My intention, for now, was just to see if it make sense to take HELOC and try to pay off existing loan faster. But as others suggested, its better to invest the rest of extra cash into other properties (as that is my intention down the line)

I would love to hear what do you suggest? The reason I put up this question was because I was myself not sure if it make sense to put that much extra cash monthly towards my mortgage or accumulate it and use it to buy other properties (with a little LOC down the line)

What would you have done?

@Harpreet Walia If you want to pay off your 1st mortgage quicker you should not just send extra $$$ to the principal. Try reaching out to your servicer first and asking them to formally ask the holder of your mortgage note for a discount. If the holder of your mortgage note is interested you will have the opportunity to save more $$$ taking this approach.

Good luck,

Ed

Originally posted by @Ed Gray :

Harpreet Walia If you want to pay off your 1st mortgage quicker you should not just send extra $$$ to the principal. Try reaching out to your servicer first and asking them to formally ask the holder of your mortgage note for a discount. If the holder of your mortgage note is interested you will have the opportunity to save more $$$ taking this approach.

Good luck,

Ed

 Ed, I dont understand. Are you asking me to reach out to lender to see if they can give me any discount (in interest rate?).

Originally posted by @Harpreet Walia :
Originally posted by @Ed Gray:

Harpreet Walia If you want to pay off your 1st mortgage quicker you should not just send extra $$$ to the principal. Try reaching out to your servicer first and asking them to formally ask the holder of your mortgage note for a discount. If the holder of your mortgage note is interested you will have the opportunity to save more $$$ taking this approach.

Good luck,

Ed

 Ed, I dont understand. Are you asking me to reach out to lender to see if they can give me any discount (in interest rate?).

 A discount works like this. These are hypothetical numbers. If your unpaid principal balance on your 1st mortgage is 100K. Chances are whoever owns your mortgage note may not have paid 100K for it (Most banks sell your mortgage to the secondary market a month or two after origination). If the owner of your mortgage note on your 1st mortgage did in fact pay less they may be willing to accept less then 100K to pay the mortgage off. Let say they bought it for 90K. Maybe they will accept 95K to pay in full. The secondary market can also be way more creative then a bank. You may be able to renegotiate larger monthly payments for a reduction in principal owed. You won't know unless you ask for the discount and open up a line of communication. Now two other things so as not to get your hopes too high. Your mortgage note may be owned by a large hedge fund and getting them to offer a discount may not work. Second the better your credit/payment history the more expensive your note was probably sold for. However it does not hurt to ask for a discount and it may work out in your favor.

Ed

Originally posted by @Ed Gray :
Originally posted by @Harpreet Walia:
Originally posted by @Ed Gray:

Harpreet Walia If you want to pay off your 1st mortgage quicker you should not just send extra $$$ to the principal. Try reaching out to your servicer first and asking them to formally ask the holder of your mortgage note for a discount. If the holder of your mortgage note is interested you will have the opportunity to save more $$$ taking this approach.

Good luck,

Ed

 Ed, I dont understand. Are you asking me to reach out to lender to see if they can give me any discount (in interest rate?).

 A discount works like this. These are hypothetical numbers. If your unpaid principal balance on your 1st mortgage is 100K. Chances are whoever owns your mortgage note may not have paid 100K for it (Most banks sell your mortgage to the secondary market a month or two after origination). If the owner of your mortgage note on your 1st mortgage did in fact pay less they may be willing to accept less then 100K to pay the mortgage off. Let say they bought it for 90K. Maybe they will accept 95K to pay in full. The secondary market can also be way more creative then a bank. You may be able to renegotiate larger monthly payments for a reduction in principal owed. You won't know unless you ask for the discount and open up a line of communication. Now two other things so as not to get your hopes too high. Your mortgage note may be owned by a large hedge fund and getting them to offer a discount may not work. Second the better your credit/payment history the more expensive your note was probably sold for. However it does not hurt to ask for a discount and it may work out in your favor.

Ed

 Thanks Ed. I can check on this. 

Originally posted by @Harpreet Walia :
Originally posted by @Christopher Leon:

Harpreet Walia is your thought to eliminate debt by taking out more debt to pay it off? Why would you want to use a LOC to pay off a mortgage already at a low int rate? Why not just pay one or two extra payment a year and knock off how ever many months/years that would take off the loan term? Perhaps I am misunderstanding..?

Thanks Leon. This is what my confusion was. Should I pay extra now or should I not do it that aggressively. 

This is my first loan arrangements and as people are saying its pretty decent/low interest rate. You got it right. 

--------------------------------------------------------------------------------

 Double check this, but I believe if you were able to pay one full extra payment a year, it would knock off approximately 4 years off your 30 yr term. This would in fact, lower the monthly payment itself, pay less interest in the long term, and give you extra money to snowball into paying the mortgage off sooner, or use those funds for other investments. 

 It's important to have a budget and understand your personal finances when making this decision. It's a great decision to make if you have net cash flows at the end of the month. If your living below your means, and you got extra money, it's a great idea. If your squeezing it every month after expenses, perhaps its not a good idea to be making an extra payment. Ideally, if you made the extra payment your just saving money which everyone likes to do. The sooner you build more equity, the sooner you can tap into the equity to buy more properties. Good luck!

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