Should I get a HELOC now or wait?

Question

Hello BP community,

Newbie/white belt here.

I have a question regarding HELOCs. My wife and I would like to make our first rental purchase in 2023 - we have a newborn so our time right now is fully dedicated to him :) We want to use the equity in our home to make a downpayment on our first rental investement property.

We bought a house in October 2021. After talking to a few lenders about HELOCs and/or home equity loans, we have been told that we're eligible for a 25k-30k loan (whether it's a HELOC or home equity loan).

My question:

Should we get a loan with a fix rate? Right now we can get about 25k-30k loan at 7%. But since we don't plan on buying soon, it seems illogical to pay monthly without using the loan. However, if we get a HELOC with variable rates, the interest rate could be much higher than 7% when we need the funds for a down payment in 2023.

Do I lock a lower interest (fixed) on my loan right now even though I don't plan on using it this year, or do I take a HELOC with variable rates, don't make payments now but risk paying a much higher rate when I draw in 2023

Thank you for your help BP community.

Cheers!

Scott E. · Answer

Get the HELOC now. If the market continues to soften or even worse start to decline, what if banks stop offering HELOCs by the time you're ready?As others have said you won't have a payment due on your HELOC until you use it. Plus there are big banks out there that have zero closing costs HELOCs meaning you pay for nothing (not even the appraisal). So there is nothing to lose by just activating the account now.The only downside is that if you open the HELOC today your draw period window will begin, which is usually 10 years.

Felix Poulin · Answer

Nathan and Scott, thanks for your insights. I appreciate you taking the time to respond. I like have the flexibility of the HELOC so I think I'm going to go in that direction. Thank you!Conner, I want to pull some equity but I worry that my house won't appraised for as much if I wait. Thoughts?Thank you all. I'm realizing that this BP community is SUPER insightful and helpful! It's a great feeling for a newbie like myself to have people who genuietly care and want to share their knowledge.Cheers!

Conner Olsen · Answer

@Felix Poulin I wouldn't pull out any money until you're ready to lose it. Yes your interest rate could be higher by then but you would be paying interest on money sitting in the bank.

Nathan Gesner · Answer

You're not paying interest on the LOC until you borrow the funds. Then you hustle and pay off the loan as quickly as possible so you're not continually paying the interest. Even if the rates go up, you're only paying interest while actively using the money, so it should cost less.If you get a traditional loan, you spend the money and then you have to apply for another loan. You can't "rinse and repeat" like you can with a LOC.

Felix Poulin · Answer

Hi Jason, It's not silly at all and thanks for your input. I've actually thought about that. I just worry that if I wait for next year, our house won't appraise for as much as it is right now and therefore we won't be able to get as much of a HELOC as desired.Let me know what you think.Thanks!Felix

Jason Maguire · Answer

Hi Felix,This may seem silly, but if you don't plan on using it until 2023 then does it make more sense to just hold off for a little longer before you pull the trigger on a HELOC? I specifically like working with fixed rates only, but variable does give you the flexibility of lower payments if rates do go down.I'd recommend holding off until you are actually ready to purchase a house, and then make a decision at that point if fixed or variable makes more sense for you.-Jason

Felix Poulin · Answer

Hi William,Thanks for taking the time to reply and for your insights! It makes sense. I think a HELOC will give me more flexibility than a Home Equity Loan with a fixed rate.Have a great day!

William Sing · Answer

Hey Felix, Congrats on the first house and the newborn. It is an exciting time for you and your wife!I'm doing something similar right now (in the process of getting the HELOC). I decided to do the HELOC since it is a lot more flexible and even though rates might get high. I chose Keybank since they have a really good HELOC with it being pretty close to the prime rate (the rate that the federal reserve sets). Overall it offers a lot more flexibility than the Home Equity Loan and if when do hit a recession, those rates will most likely go down which means you may be holding a loan with a higher interest rate. You can also use part of the HELOC amount if needed. You might be able to save up the rest of the for the next downpayment and not need to use as much of the HELOC or use it for emergency situations. Just some thoughts. Take them or leave them but hope it helps :)