what to do AFTER using a Heloc to purchase rental

Question

I have used a Heloc from my primary house to put a down payment down on a rental. I got that far.  Now, however, I can't find any articles/guidance as to how to pay the mortgage and the Heloc.  I know to put my salary into the Heloc account so I avoid the interest charges.  But...can anyone point me in the right direction of podcasts/blogs etc..that discuss the steps/pros/cons of what to do next? For example, do we use the cash flow (about $350 a month) to put into the Heloc so I can stop putting my salary in there. Or do I use the cash flow to pay down the mortgage faster?  Our rate is %6 which I think was a cruddy rate considering we have great credit.  That makes me want to pay it off as fast as possible.  Thanks for your advice.

Andrew Postell · Answer

@Heather Uhlir you should 100% be paying that HELOC back before any fixed rate loans.  Two of the common areas of concern for HELOCs I see out there is the 10 year maturity date and the adjustable rate. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. With rates moving higher, it is likely that your rate will increase in the future. So paying down the balance would help you if the rate adjusted upward.  The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC for 10 years it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

So yes, pay that HELOC back asap.  It's totally ok to use HELOCs...I hope this didn't make it sound like they are bad....but you need a plan to pay them back.  Flippers love HELOCs because they use them, pay them back when the home sells, use them again, etc.  Hope this helps!

Heather U. · Answer

Thank you Andrew.  Appreciate your guidance. And very good to know for me to keep a close eye on the Heloc as it can change!

Heather U. · Answer

I see. Thanks Max. So you would refinance the Heloc, combine it together with the mortgage and take out one loan? Is that right?

Max T. · Answer

I only use the HELOC for short term financing. If used for a down payment on a rental that means I am either refinancing with a conventional loan or selling it within a year or two.

Heather U. · Answer

Thank you Matt, for your reply. So I like the idea of using the cash flow to pay off the heloc. This is the rinse and repeat cycle right? But the way I figure it that will take me 7 years. Cash flow of about $300 a month. Heloc of $25000.  I think I’m missing something??

Matt Crusinberry · Answer

@Heather Uhlir, I believe this depends on which one you owe less on, utilizing the debt snowball that is (as per Dave Ramsey). This really depends on you and your goals. We try to buy properties that we can BRRRR, put the money back, and then use the properties income to pay for the new mortgage on that particular property. This allows us to do it again and again, thus using it like a credit card with low interest payments. I personally would use the rent money to pay off the HELOC so you can use it again and again. I hope this helps, and feel free to PM me if you would like more specifics. Good luck!

what to do AFTER using a Heloc to purchase rental

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