Paying off mortgage soon... next steps??

Question

I am asking this on behalf of my parents. After years and years of paying a mortgage, my parents are about 6 months out from paying off their mortgage (Woohoo!). With their new grandbaby, they are looking to move up closer to me in the next couple of years.

They are considering many options moving forward - Short term rental (live about 20 minutes from the ocean), Long term rental, or even long term rental for military (live 15 minutes from a naval base).

My dad doesn't want to sell the house after paying it off. He is considering buying a house closer to me (in Dallas, TX) and renting it out while they are still living there.

If he did that, can he use HELOC after paying off mortgage?

Just doing a lot of brainstorming right now. Any ideas will help!

Thank you,

Ryan

Dave Skow · Answer

@ryan - if keeping the  house -  have them  get the  HELOC  they want in place  now   before they  payoff the  1st mtg  ....some lenders  wont do  helocs in  first position and  some  get  confused  when trying to  do a heloc in 1st position

Doug Spence · Answer

@Ryan DeLeon I would definitely look into a cash out refinance for your parents. There will be fees involved in getting the loan (just like a regular mortgage) but they will be able to get a large chunk of the equity out without having to pay any taxes on it. They could use that capital to furnish it as a STR and probably have enough put a down payment on a new home, depending on how much the new home is and how much equity they have in the existing home.

There are lots of options out there, but I recommend they get 'crystal clear' on their goals so they can identify a strategy that best suits their goals.

Good luck and keep us all updated on what they decide. This will help others make a decision, as I imagine there are many others out there in the same predicament.

Ryan DeLeon · Answer

Thank you for the response @Kerry Baird ! This is great information! So after paying off the mortgage, it might be a good idea to consider getting their house refinanced? Like a Cash-out refinance?

Jim Paulson · Answer

Another option to consider for your parents if they are 62+ is look into a reverse mortgage for them on their current or next home.  I was talking to a lender that was doing classes on reverse mortgages and he asked me if I had any interest in buying a second home when I retired and how I intended to finance it.   I said I intended to pay cash.  He replied "If I could show you how to only pay about 65% of the amount and never make another payment wouldn't you be interested in that option?  I took his class.

Jim Paulson · Answer

I was shocked when I paid off my mortgage that my lender actually required me to close out the HELOC.  I didn't have a balance on it, but it was a nice safety net knowing I was able to pull out $50k like a savings account at will.  I never understood why they didn't want to be in first position instead of second position!

Conner Olsen · Answer

I believe it is better to do a cash out refinance if you are using the money for a down payment because you need that money indefinitely. If you need it for a short period of time, like flipping a house and can pay it off quickly, then it makes sense to do a HELOC.

For example: You have 100k house fully paid off and you want 25k for a down payment on another 100k house. A 7% interest rate right now puts your interest payment at $180/month. Lets say your new investment property cash flows $380/month before the interest payment of the HELOC and $200 after paying the interest. The fed decides to keep raising interest rates and now your HELOC is 14%. Your interest payment is now $360/month and you only cash flow $20/month and this does not include principal payback. Now let's say you do a cash out refinance of $20k at 5.5% for 10 years and your monthly payment is $217/month. You don't care about interest rates because you are locked in. You know what your monthly payment is going to be so you can be more confident in the cash flow.

HELOCs are typically a higher interest rate than a fixed mortgage and don't include principal payback. I believe you have more flexibility with a fixed rate mortgage because it's easier to pay it off early.

Ryan DeLeon · Answer

@Conner Olsen Thank you for the response! They were indeed planning on using the money as a down payment for the next home. You say that it may be a better option to refinance than get a HELOC due the the variable interest rates. What exactly would they refinance? The HELOC or another loan? Sorry, new to this and trying to understand.

Kerry Baird · Answer

The variable rate (mentioned above) on a HELOC will make them pucker.  They've seen mortgage rates in the stratosphere before.  Perhaps they have cash to use for the next purchase. HELOCs are challenging in Texas because of the homestead & Texas laws.

It would be easier to get their house refinanced as an owner occupant house than as a rental house when folks likely do not have rental experience.

My experience with long term tenants near a military base: I can check the month housing allowance online (called BAH) and determine from that what rents should be.  You must not discriminate, take a look at fair housing laws.  I manage the houses I own in my own state (and pay myself the PM fee), and I have a property manager for the houses I have in Texas.

Conner Olsen · Answer

@Ryan DeLeon You can get a HELOC as long as your property has enough equity, in their case they'll have 100% equity so they can probably get around 80% equity in a HELOC. If they plan on using the money as a down payment on more properties sometimes it is better to refinance than get a HELOC because of the variable interest rates. Totally up to them and their comfort level.

Paying off mortgage soon... next steps??

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