HELOC promo rate vs. Fixed refi

Realtor · Ogden, UT · Member since 2019 · 338 posts · 415 votes

3y

Based on current mortgage rates and your family history with the debt-free property, I'd definitely lean towards the HELOC.

The HELOC is nice for a few reasons including the fact that you can access and replace the funds at will and at whatever amount you need. With a refi, you get a set lump sum once and have to go from there. Also, HELOC rates are still low, mortgages are not, so take advantage of that intro rate while it's there!

Good luck,

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Albert Bui

Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes

3y

Quote from @Laurie Isabell:

My mom quit claimed our family home to me, giving herself and her partner lifetime use with myself as remainderman. Sadly both have passed and I have realized I should have leveraged the equity in the home a year ago when rates were so low. I'm now looking at a HELOC through the local credit union that offers a 1.99% 12 month promo rate then prime plus 1% afterwards. 30% LTV. Am I better off with that since it's technically my primary or getting a fixed cash out refinance on it with a rate in the sixes? There is no mortgage on the home, but I've always been apprehensive to leverage it since it has been on my family since the 60s and was so important to my mom that it stay debt free. It's a huge home with a ton of upkeep, but also a ton of potential and I'm emotionally attached without a doubt. What is the smartest way for me to leverage this asset? Also, I added the deed set up details, as it has been confusing for lenders. Is there a way to update the deed so it doesn't come up with their names still? I had to provide death certificates, etc. Which is difficult emotionally. Thank you!

HI Laurie,

This one is going to be a balance of home sentiment, personal financial confidence based on your particular situation, and the choice of product.

Choosing the right product will also be based on your perception of financial risk and your goals as well.

A line or HELOC has its pros because you only pay interest if you use it which is nice because if you dont use it you dont pay anything other than the 0-75 dollar admin fee (most heloc's have this and some dont just make sure to leave it on auto pay to avoid forgetting and incurring a late on your credit report).

The downside with the HELOC is the insidious variable rate feature (margin + prime which is currently at 7% as of this writing). I know you have that super nice introductory rate but just keep this in mind when you make that decisioning.

The fixed rate options can give peace of mind when obtaining that 30% LTV loan because its a fixed rate, fixed payment for the life of the loan and you can always decide to pay it faster if you want. There is no variations or rate risk since it's "fixed," however the downside is on day 1 when you get that 30% LTV loan you'll be accruing interest.

So at the end of the day familiarize your self with both payments from hypthetical scenarios with that HELOC at different rates 7-12% just in case that eventuality comes to pass or go the fixed route for peace of mind but know the pros and cons of each.

Good Luck on your game plan.

@Matthew Kwan

@Carlos Valencia

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Paul DefnginPro Member

Lender · Rockville, MD · Member since 2008 · 498 posts · 199 votes

3y

Quote from @Laurie Isabell:

My mom quit claimed our family home to me, giving herself and her partner lifetime use with myself as remainderman. Sadly both have passed and I have realized I should have leveraged the equity in the home a year ago when rates were so low. I'm now looking at a HELOC through the local credit union that offers a 1.99% 12 month promo rate then prime plus 1% afterwards. 30% LTV. Am I better off with that since it's technically my primary or getting a fixed cash out refinance on it with a rate in the sixes? There is no mortgage on the home, but I've always been apprehensive to leverage it since it has been on my family since the 60s and was so important to my mom that it stay debt free. It's a huge home with a ton of upkeep, but also a ton of potential and I'm emotionally attached without a doubt. What is the smartest way for me to leverage this asset? Also, I added the deed set up details, as it has been confusing for lenders. Is there a way to update the deed so it doesn't come up with their names still? I had to provide death certificates, etc. Which is difficult emotionally. Thank you!

I agree with @Brad Jacobson on this too. If I were in your shoes I would definitely lean towards the HELOC. I would do the upkeep in stages and based on what you can afford to pay at Prime plus 2-3%, not the true 1%. This way you can anticipate and worse case scenario, in the event that Fed keeps increasing rates in the next year or so.

Also I would look into seeing if the credit union based their payment on interest only on the balance drawn or if they use a fixed percentage. I prefer the interest only to keep the payment as manageable as possible, and give me the flexibility to pay more towards it as I see fit.

Most credit unions nowadays use a fixed percentage like 1-1.50% of the balance which is great because a portion goes towards principal but for me; I prefer the IO option.

For the deed just provide the credit union copies of the death certificates and the deed for the chain of title.

Good luck.

2 Reply

Becca F.

Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes

3y

@Laurie Isabell

I'm sorry about the passing of your mom and her partner. I did an equity line with Figure Lending on a mortgage free house but it wasn't a traditional HELOC. It seemed liked combination of an equity loan and HELOC. They deposited the entire amount in my bank account after closing. I did a line of $250,000. I have a fixed 30 year rate at 6.41% (no points) but I got the line in April 2022. I'm making fixed monthly payments. Most of the payment goes to interest and very little to principal so I've barely paid it down in 6 months. My local lender said the interest amortization is front loaded - she really likes Figure and even took out a line of credit herself. The process was very quick. In my case, I didn't have to upload tax returns, etc. since my property was mortgage free and approved within 3 days, signed with a notary then received the funds in less than a week. The rates are higher with investment properties than a primary residence, like most loans or lines of credit.

The only thing I don't like about Figure is it's reported as revolving debt (grouped in with my credit cards) so my credit utilization goes way up (except for with Equifax which classified it as a mortgage loan). The draw period ends in 5 years. If I wanted to draw more money, which I wouldn't do, I'd pay the current interest rate, which is 9.16% (when I asked them last week). If I make payment of 10% of the balance, the line re-amortizes and my monthly payment would be lower.

I'm refinancing to a 30 year fixed cash out refinance because I need more money for the renovation (not inexpensive in San Francisco Bay Area). I didn't want to drive up my credit utilization score more by doing a HELOC or another Figure line. One lender said I could keep the Figure line open but balance would need to be paid down to $0. Figure was okay subordinating to another lender to 2nd position. Three lenders said no, have to pay off the Figure line.

My renovation costs have a running total of $285,000 (sounds bad but in the context of a California property with lots of equity with no first mortgage, it's not). Landscaping and maybe a new fence are the next projects. All new electrical wiring (down to the studs in the kitchen and bathrooms) put it over budget $100,000. The house looks amazing and my tenants have a safe, clean, up to code place to live in with new everything. I'm glad I didn't take the cheap route (a repair person to sand and re-paint cabinets or reface the cabinets and install new countertops). I used a licensed contractor and a licensed painter with EPA certification. I wasn't going to get market rate rent with an old kitchen and bathrooms and it would have been a fire hazard.

I personally like having a fixed monthly payment. If I had smaller less costly renovation project, I might have done a HELOC. Good luck!

1 Reply

Robin SimonBusiness Member

Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes

3y

Quote from @Brad Jacobson:

Based on current mortgage rates and your family history with the debt-free property, I'd definitely lean towards the HELOC.

The HELOC is nice for a few reasons including the fact that you can access and replace the funds at will and at whatever amount you need. With a refi, you get a set lump sum once and have to go from there. Also, HELOC rates are still low, mortgages are not, so take advantage of that intro rate while it's there!

Good luck,

Agree with this - do the HELOC credit union teaser then do a 30-year fixed rate cash-out refinance later down the road when rates come down (probably will line up pretty well timing wise when the 12 mo promo runs out!)

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HELOC promo rate vs. Fixed refi

HELOC promo rate vs. Fixed refi

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