Managing your HELOC

[Shane C Tack]

I have a HELOC on my personal residence that I'm currently in the process of remodeling. I have good equity in the house so I pulled out a HELOC to help with the remodel expenses. Over the last year the interest rate has gone from 5% up to 10%. I feel like everyone always talks about using HELOCs to buy more house or remodel, but no one ever talks about managing the high costs of borrowing the money. I don't want to just be paying interest everyone month and not be making a dent in the principal. I have some cash saved up but would rather keep that as an emergency fund. Would be great to hear how people actually manage their lines of credit. Thanks!

[Steve Vaughan]

Quote from @Shane C Tack:

I have a HELOC on my personal residence that I'm currently in the process of remodeling. I pulled out a HELOC to help with the remodel expenses. Over the last year the interest rate has gone from 5% up to 10%. Would be great to hear how people actually manage their lines of credit. Thanks!

We locked our rate when we took out our heloc in 2021. Ours is a 1st on a free and clear home. 

For ratios- floating rate at the time was 3.75%,  3yr lock 4.3%, 5yr lock 4.75%. 

It's tempting to take the floating rate, but if you know you will be financing a long-term project or asset, the longer lock makes sense in a rising rate environment.  The rate certainty is worth the small premium. 

I'd be paying this down aggressively and use the heloc as my emergency fund vs my long-term leverage fund.  10% is crazy. 

[Carlos Ptriawan]

Quote from @Shane C Tack:

I have a HELOC on my personal residence that I'm currently in the process of remodeling. I have good equity in the house so I pulled out a HELOC to help with the remodel expenses. Over the last year the interest rate has gone from 5% up to 10%. I feel like everyone always talks about using HELOCs to buy more house or remodel, but no one ever talks about managing the high costs of borrowing the money. I don't want to just be paying interest everyone month and not be making a dent in the principal. I have some cash saved up but would rather keep that as an emergency fund. Would be great to hear how people actually manage their lines of credit. Thanks!

yes you should be careful with variable rate loan, HELOC is actually very dangerous. Even DSCR is dangerous in my view.

One way to strategize variable rate loan, is the following:
1. either you know when you would sell the house in the future OR
2. your bank has facility to convert some tranches of HELOC portion into a fixed payment.

FOr number 2, Bethpage CU for example, has such product, but I dont want to promote them otherwise I get warning from BP LOL.
Also everyone expect the rate to be lower in 2025/2026.
In that circumstances, you could refi the whole loan in 2026 or just sell it.

[Ash Hegde]

HELOC's are meant to be used for a short term. As mentioned, some lenders allow you to lock a portion of your balance and convert it to a fixed rate. Not all HELOC's will have that option. For major improvements that will take a long time to pay down, a home equity loan likely would have been better.

Some people do use them for investing, but usually for something like a flip or a BRRRR, where they intend to get cash out of the property and pay the HELOC off quickly.

[Chris Davidson]

@Shane C Tack it comes down to just managing it. They aren't meant for long term financing, you should be paying them off quickly. If you have some years left on your HELOC why not pay down a chuck and keep smaller amount in reserves that way your interest is lower. As it comes time to roll the HELOC work on building back up the Efund.
Finally some use up the whole HELOC when they shouldn't you have to manage your cashflow and make sure you can make your debt payments. As the rate goes up you need to speed up your paydown or look at shifting the debt to LT debt.

[Shane C Tack]

Thanks for all the input! I hesitate to use my emergency fund to pay down the balance because its nice to have access to cash. I have been debating paying down a large portion of it though and still maintain some cash. I have made adjustments to my expenses and other investments to start making a bigger dent in the balance. Unfortunately with the high cost to borrow my remodel will probably slow down a bit

[Jeff Fountain]

Shane, you can probably keep your HELOC open and continue it as a "go-to account". Pay down your current HELOC principal with your cash as suggested by Chris and have the HELOC for your emergency fund. Odds are you will not need your emergency cash. I get the warm and fuzzy provided by having that cash on hand but you are probably paying a lot of money for that scenario. Reduce your costs and maintain an avenue (HELOC) for immediate cash.

[Jake Andronico]

"I feel like everyone always talks about using HELOCs to buy more house or remodel, but no one ever talks about managing the high costs of borrowing the money."

Completely agree. 

No shame in paying down your debt and taking a step back. Everyone was pushing more debt hard these last few years but for good reason, it was historically cheap! 

Now, that is not the case, and I believe adjusting accordingly makes sense. Especially w/ variable rates. 

Hopefully you're able to balance the remodel, emergency fund, and principal pay down with something that makes financial sense for you.  

Curious to hear what you decided.