HELOC fixed rates advice needed

13 Replies

First time investor, hopefully the start to long term financial independence.  

As someone starting out as long term buy-and-hold rental investor, we are looking for relatively good conditioned places in $125-300k/units.

HELOC terms: all fixed with 80% LTV for my primary residence

$160k available to take out from HELOC; also another $150k in current bank accounts

5 yr at 2.25% (~$2900/month in P&I payments)

10 yr at ~2.43%

15 yr at ~2.65%

30 yr at >3.15%

Question:

Which HELOC terms would you recommend?

Lowest APR/length with highest monthly payments or take 15 yr (30yr apr is too high in my opinion) for lowest monthly to maximize monthly cash flow to save for future additional properties?

thanks so much!

I would likely go with 30 year.....My opinion is inflation is rising and so will interest rates.  I'd rather be higher, but know my rate is secure.  I also only use HELOCs for short term....6mo at a time.  For 6 months at a time, this is a max $720 decision between the 5yr and 30y rate.  That seems like a fair price to insure yourself against inflation or rising interest rates.

Originally posted by @Ryan Howell :

I would likely go with 30 year.....My opinion is inflation is rising and so will interest rates.  I'd rather be higher, but know my rate is secure.  I also only use HELOCs for short term....6mo at a time.  For 6 months at a time, this is a max $720 decision between the 5yr and 30y rate.  That seems like a fair price to insure yourself against inflation or rising interest rates.

Thank you for the quick response.  

So what you're saying is: if I choose a 30yr term, even if I take out the whole $160k at a higher rate (3.1 vs 2.2), the difference in total interests paid in 6 months is $720?  And I can do it over and over again?  Also, the $160k rate at 3.1% is held for the next 30 yr with only p/i payments during the time the money is out of the account?

thanks

@Hoi Lee   (30yr apr is too high in my opinion)


Historically 3.15% rate is basically free money. That is an extremely low rate. Maybe a little high by todays standards but still very low. I have never had a loan that low in my entire life. The historical average is probably more like 6 to 7%. 

Be sure that the 30 year rate is fixed. Most HELOCs have a variable rate. 

The reason I felt 3.15% was too high for now is because I qualified and was in application to get a 15 yr mortgage for an investment property at 3.0% already, so HELOC at 3.15% wouldn't make sense for now.

@Hoi Lee no one can make the right choice for you. The lower rate and shorter term may be right for you. 

My point is in 5 or 10 years, you are probably going to be getting rates more like the long term averages, say 7%. At that point you might regret no locking in long term at 3.15%. Also as rents increase due to inflation, yet the fixed mortgage rates stay the same.  This is a big reason locking in long term low rates can be beneficial. 

Also the difference between 2% and 2.5% is a small payment difference. When the interest rates get higher like between 7 and 7.5% it makes a much bigger difference in payments.  When we are talking about today's low interest rates a small difference in rate is not very significant. 

I'm not suggesting which way you go, just food for thought. 

Typically HELOCs are variable...if you can get a 30y fixed rate HELOC at 3.15%, I would take that all day long.

There are two reasons to do a refinance instead of a HELOC - #1 is variable rate - the rate will swing with the market, so if you want to pull out money from a property to invest in another property, you would be smarter to do a cash out refi typically because its fixed rate and the HELOC is variable. So my normal advice is to only use a HELOC for short term funds...BUT if you're getting a 30y fixed HELOC, that changes the game significantly. Now you can pay down and draw on that money when you want, saving a ton of interest over time. If you do a cash out refinance, and you pay it down, you have to refinance to ever access that equity again, now you've solved that problem.

The 2nd reason for a refinance over HELOC is it is less likely to be called by the bank since its a bank product (cash out refi isn't going to be called unless there is a due on sale clause you violate which is still low risk). I would still treat lightly here and study the product to see if you think that's a risk or not. If they give you a fixed rate, but rates jump to 7%, they may just call the note due.

Do you mind sharing the name of the bank offering the HELOC? Are they national?

Originally posted by @Ryan Howell :

Typically HELOCs are variable...if you can get a 30y fixed rate HELOC at 3.15%, I would take that all day long.

There are two reasons to do a refinance instead of a HELOC - #1 is variable rate - the rate will swing with the market, so if you want to pull out money from a property to invest in another property, you would be smarter to do a cash out refi typically because its fixed rate and the HELOC is variable. So my normal advice is to only use a HELOC for short term funds...BUT if you're getting a 30y fixed HELOC, that changes the game significantly. Now you can pay down and draw on that money when you want, saving a ton of interest over time. If you do a cash out refinance, and you pay it down, you have to refinance to ever access that equity again, now you've solved that problem.

The 2nd reason for a refinance over HELOC is it is less likely to be called by the bank since its a bank product (cash out refi isn't going to be called unless there is a due on sale clause you violate which is still low risk). I would still treat lightly here and study the product to see if you think that's a risk or not. If they give you a fixed rate, but rates jump to 7%, they may just call the note due.

Do you mind sharing the name of the bank offering the HELOC? Are they national?

Thanks for the advise!
It is from PNC Bank here in the Northeast
Originally posted by @Matt Groth :

@Ned Carey can you imagine, even 5 or 10 years ago, saying 3ish percent, for 30 years, is "high "?

I know. When I bought my first house in 2007, interests were ~6-7% and it was low. Refinanced once at 5% before selling in 2014. Now, my current house is refinanced at 1.95% (1.98 APR).

Another thing I should mention: I am planning to retire in 15 years from my regular job and hopefully, I don't go chasing for more investment units by then also.  Therefore, just looking for the lowest 15 yr rate.

Thanks for the continual advice and pointers.  

Keep them coming!

@Alan Nelson My loan officer at the local PNC branch worked out some numbers for me. The LTV ratio is <80% and she helped me to ensure that the variable rate can be "fixed" once 100% disbursed at the SAME rate for 30 years, 3.14%, as the current variable rate at 3.14%. If I wanted to fix it for 15-yr, then 2.84%, and 10 yr at 2.64%. It is at the PNC branch at Concordville PA, by West Chester PA. Hope this helps.