We have an unsecured Personal Line of Credit for about 3 years now and have not used it. We're currently under contract for a property in a promising area which we're paying cash for and not looking to dump anymore liquid assets into funding the rehab.
We're not sure just yet on keeping this as a rental (cash flow) vs flipping. Different discussion and number crunching there.
One of the options would be to use the LOC but not entirely sure how it works. Let's say we use $20K from it, how would we determine the following -
- With the rate being variable, how can we determine the current rate?
- Is there a term associated with paying back the $20K?
- How accurate is the Bankrate calculator?
- What would be other alternatives to funding the distressed property?
If you are using a personal line of credit to fund the rehab then some of your questions don't apply. Presumably the bank received some other colateral that they were satisfied with when you set it up.
- there is no explicit term on a LOC. The interest is just added to the balance outstanding up to the maximum amount of the LOC. You may get a call as you approach the limit but that's about it.
- the interest rate is the one you agreed to. Usually this tied to either prime or fed rate or someother benchmark and WILL fluctuate as that benchmark changes. Depending on how long the funds will be outstanding, this should not be an issue. Rates are rising but not quickly. Call the bank and ask them what the current rate is and what it is based on.
- with the above being case - I would assume that the bankrate calculator is accurate (its not a difficult calculation) but note that one of the inputs is the number of months. With a LOC, you can pay back as much (or as little) as you want at any time so if you flip, you can pay it all back once the sale closes and if you hold, you can use the cash flow to pay back and if you have other income, you can pay back from there or any other funds you happen to have.
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