HELOC variable rate. Should I lock it now?

Question

Hi all,

I purchased a rental house back in Dec. at a low interest rate and using a HELOC for down payment and rehab costs. With interest rates rising and those of us with HELOCs with variable rates, what's the strategy that would help a Buy/Hold investor to weather these economy for the coming years? I wanted to do a refi cash-out after my rehab, but that took 2 months longer than anticipated and the rates are not favorable for me to do that. Besides...I'm not sure I could get what I need from a refi cash-out to cover the mortgage (1st lien) and the HELCO (2nd lien).

Details of the financing below:

Purchase price: $255KMortgage: 3.0% for 30 yearsHELOC: 5% (as of today) for an 10 year interest only paymentRehab costs: $80KMonthly mortgage/taxes/insurance is: $2395HELOC is : $433 (as of today)I have the opportunity to lock in the HELOC rate 3 times in the life of the Loan, but it would up my expenses.Here are my options with the HELOC:1) Interest only – option30 year calculation (360 months)Use the current prime rate, add in your margin 1.5 to get the rate, and only look at your Interest portion to determine your minimum payment

2) Rate lock - optionWill be 20 years (240 months) of principal and interest paymentsRate = current prime rate, + your margin 1.5 + HELOC current lock in margin .75

Please offer your thoughts as I'm sure I should lock in at whatever the interest rate is now, but it would up my HELOC monthly payment to $1050 for 20 years. Or should I just pay the interest only mortgage that adjusts with the Prime rate.

Thank you

Kerry Baird · Answer

It's hard to predict.  The Fed might have over done their interest rate hikes, and rates will come down in the future.  Or, inflation is the problem they choose to solve with more rate hikes.  The Fed has communicated the intention to continue rate hikes.

Where did you get a HELOC?  Is it on your primary?

Jay C. · Answer

Hi @Walter Pineda,

Using a HELOC was a great way to fund a rehab. I did notice that Pen Fed in particular was finicky with cashing checks. Several of my contractors weren't able to cash the checks from Pen Fed due to electronic ACH from the credit union to another bank. To get around this, I moved the HELOC funds I needed to pay the contractors to my personal account and paid from there. 2 extra steps, but not too bad.

Best wishes on your rehab.

Walter Pineda · Answer

Hi! Thanks for posting I plan to use a Heloc for the rehab on a rentaland learned for your experience thanks again. My uneducated opinionwould be to keep the cash flow. Yeah, the fed's meeting is on July 27-28 but no one can predict the future.

Jay C. · Answer

Hi Kerry,

I got my HELOC on our first home that became our first rental property after we moved out. Pen Fed allows HELOCS for a rental investment properties. After studying this chart of Prime rate changes over the past few decades, I can say I'd rather pay the Prime Rate that is variable and cash flows better than, pay down my HELOC and kills my cash flow by $800.