Getting crushed by HELOC interest

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Getting crushed by HELOC interest

Nick Causa
Greenwich, CT · Member since 2017 · 81 posts · 8 votes
Quick background: We purchased a multi family that was to be a live in flip and to fund the purchase and the reno we leveraged our primary residence at the time. We moved into the live in flip and once the flip was over we refi’d hoping to recoup everything. We didnt do a cashout refi because the rate on the mortgage wouldve been too high, so we took out another HELOC. Since we did not recoup the costs to pay back the first HELOC, we now have two maxed out HELOCS. Long story short, the reno cost way more that anticipated. Whats done is done and we learned a lot during the process but now we’re gettting hammered with those HELOCS because the interest rates are skyrocketing. One is at 7.5% and the other at 9.3%. I’m considering taking out a 401k loan to knock down the amount of one of the helocs (9.3% because its highest and also interest only). This way, the interest payments will go to us, we can pay back the heloc faster, and 9.3% is not a gain im seeing in the market anytime soon. I know theres no way to time the market but things are looking bleak in the future so i feel any unrealized gains we would be missing wouldnt be so bad. The real problem is paying a pre tax value back with post tax dollars. Anyone have any suggestions?
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V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y

A loan to payoff another loan. You need to get out of the property. Hopefully, people read this and stop playing the super leveraged game.

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  • Mitch Davidson
    Lender · Asheville, NC · Member since 2020 · 463 posts · 507 votes
    3y

    Hi N@Nick Causa. That’s a tough, personal decision. Here are some thoughts:

    - It sounds like you have an FHA mortgage on the MF property, as you said you put 3.5% down. If that's the case, I'm assuming you're paying over $400/mon in MIP. Personally, that would bother me as much as the rising HELOC payment. A Conventional refi or ARM could put an end to that.

    - If you refi into a new FHA loan, you'll get hit again with the 1.75%-of-loan-amount fee for up-front MI. Thus I would avoid FHA for the refi.

    - Unless you opened the HELOC on the same day that you closed on the purchase and primary mortgage, the refi will be a cash-out in type, even if you don't take cash proceeds at closing. That's important because you now need to wait 12 months to close on a Conventional cash-out (12 months for a property that is financed, that is; only 6 months if the home was bought with cash).

    - If you do some sort of a cash-out now, you’ll still be able to take advantage of lower rates and do a rate/term refi whenever rates go down, without a wait period. Of course, you’ll likely incur a few grand or so of closing costs for each refi, which can be rolled into the new loan.

    - If you envision paying off the second lien in the near future, I don’t think a cash-out refi makes sense.

    - Using the numbers you provided, and a rate of 10% instead of 9.3% for the HELOC (seems reasonable to plan for it to hit 10% soon, as Prime is predicted to keep rising), it seems that the new ARM loan would put you at about $500/mon higher regarding total payment, but that the end of FHA MIP would nullify most of that increase, and that it'd thus be about a wash.

    - If you refinance the property as your primary residence and shortly after seek a new mortgage for a new primary residence, if much less than 12 months have passed since the refi you may have trouble getting the new loan, as you’re going to make a new commitment in your refi docs regarding intended occupancy.

    - For some people, especially as time marches on, the need to get out of an ARM loan before adjustment is stressful. It may be worth considering Conventional fixed, if it won't cost you much more.

    - The option of a fixed equity loan to replace the HELOC might only save you $150/mon compared to the current HELOC rate, but it'll give you some peace of mind, and perhaps buy you some time to think about a cash-out and to perhaps wait and see if rates for a cash-out fall in the summer.

    Hope this helps.

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  • Dan B.
    San Diego, CA · Member since 2016 · 19 posts · 6 votes
    3y

    @Nick Causa, I'm in a similar position. My HELOC is on our primary residence, but the interest is brutal. Current plan is to get a new HELOC with a local credit union with a low intro fixed rate for a year and get extra aggressive paying down the balance.

    In my opinion, don't touch the 401k, just get aggressive paying down the high interest balance.

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  • Nick Causa
    OP
    Greenwich, CT · Member since 2017 · 81 posts · 8 votes
    3y
    @Mitch Davidson thanks Mitch. No no PMI. We bought the house with an FHA 3.5% down payment but refied right when we completed the reno and got tenants. We had a lot of equity so we opened an interest only HELOC (lower monthly payments) to recoup reno costs. As for the equity loan, its something im considering so i can crush the HELOC but its 7% along with a monthly payment of $1130 which is much higher than the interest only (the benefit is that it is principle and interest though). Is it better to have low monthly payments to keep expenses low or less interest tied to larger monthly payments?
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  • Mitch Davidson
    Lender · Asheville, NC · Member since 2020 · 463 posts · 507 votes
    3y

    @Nick Causa: If you can afford the higher payment I'd pursue the new loan for sake of a rate that's both lower and fixed. Beware that these type of loans often come with prepayment penalties though, but that some states (like NC) disallow such.

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  • Austin F.
    Investor · MI · Member since 2015 · 227 posts · 478 votes
    3y
    When I opened my HELOC my lender said I can "term it out" at any time. Basically close the line, then it turns into a 20 year loan at whatever rate at my current balance. Possibly ask your lender if there are options like that?


    How much principal are you able to pay on the HELOC currently, can you increase that number?
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  • Dave Skow
    Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
    3y

    @Nick Causa 1) ask the present lenders on the helocs if they can convert to a fixed installment loan and out of the varaible HELOC structure 2) 401K loan decent idea but it sounds like this wont be ample to payoff the heloc balances

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  • Nick Causa
    OP
    Greenwich, CT · Member since 2017 · 81 posts · 8 votes
    3y
    @Dave Skow i can do that thanks. I think the smart thing to do is take the Home equity loan and pay off the HELOC. The loan im getting quoted is 7% with an $1130 payment that goes towards P&I. 7% P&I is brutal but its better than 9.3% Interst only! Refinancing a 575k loan from 3.5% to a new loan of 693k at 5.75% seems almost worse than borrowing from my 401k (which i wont do). The math on the interest for that new loan is $278,880 after 7 years as opposed to what 7 years on my current loan looks like ($140,868). Looking at it this way feels like a no brainer even if the other option satisfies that Interest only HELOC fully.
    1Reply
  • Jay ThomasPro Member
    Real Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
    3y

    Cash out refis are often used as a real estate investment strategy, and it looks like you could benefit from doing one now. The current rates for 7/1 ARMS are lower than what you mentioned, so this could be an effective way to reduce your payment and improve your financial situation. It's possible that the mistake you made can be corrected with cash out refi – try researching more about it and see if it fits into your plans!

    To sum up, cash out refinance might be a good option to consider in order to address the issue of your high mortgage payments. With the current rates for 7/1 ARMS being lower than what was mentioned, this could potentially help you cut back on costs while still allowing you to make your real estate investment. It may be worth looking into and seeing if this fits into your plans! Good luck with whatever you decide!

    [email protected]832-889-5607
    1Reply
  • Nick Causa
    OP
    Greenwich, CT · Member since 2017 · 81 posts · 8 votes
    3y
    @Jay Thomas thanks Jay. Yes i connected with my bank about this as well since i have a lot of equity in the properties but the rates are quite high as you could imagine and take my 3.5% on the 575k and bring it to 5.75% at a 693k loan. Lots of interest to pay in that term and who knows if the rates ever come down in that time?
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