HELOC vs Conventional Mortgage over a 5y term

[Adam Mazzochi]

The title says it all what are you thoughts of taking value out of your house to buy another you will rent out and pay off within 5 years vs purchasing a rental house with the brrrr strategy or just getting a mortgage on a turn key investment. If have any pros or cons please list them below and thank you. Adam Mazzochi

[Andrew Postell]

@Adam Mazzochi I hope you don't mind me commenting here even though it has been several days since your post.  This question is a common one and I wanted to share some thoughts on HELOCs.

HELOCs are a great product for investors.  Quick access to cash.  Low closing costs.  Use it, pay it back, use it again. Flippers love this product. Super helpful when needed.  I would recommend that every investor have one if you have that ability.

However, you need a plan to pay it back. HELOC's have variable rates. So your rate this year may not be your rate in a couple of years. I have seen people get caught off guard with these before when the rates change.

But what you may not know is that your HELOC will mature into something entirely different after 10 years of when it was opened. So if you have it opened for 7 years...never using it....then have a balance on it for 3 years...your HELOC will "modify" into a 20 year loan and the rate will increase about 2 points. The rate will then become fixed but I have seen many of these become 8+% rates in a hurry.

In your scenario I don't mind the 5 year plan but ABSOLUTELY check into the terms and conditions for your loan. Also, know when you opened it and make sure that if rates increase that you have a plan for it. HELOC's are really good products but they are like credit cards...GIANT credit cards....and you know how every financial planner feels about credit card debt. Plan accordingly.