What would you do if you had an open Heloc

Question

Hello BiggerPockets members. I hope everyone is staying healthy physically, mentally, and financially.

My question is the following: If you have a Home Equity Line of Credit(HELOC) would you consider transferring the balance to your bank account? Yes, I would have to pay interest rate on it every month, but I don't have to worry about the bank closing my HELOC if my home loses value. My hope is to have cash available to invest if homes go down in value as predicted in a few months.

Few Specifics:

-I own a small business which is affected by covid19

-My credit score is above 750.

- I had to use my father as a co-signer to get approved

-I have a HELOC total of $150,000 (using my home and my rental)

-Interest rate is between 3% -4%-If I transfer all of it, my monthly interest payment would be roughly for $440

I know there is a chance they might not closed the line of credit, and in that case I would be losing that amount every month.

Is that monthly expense worth the guaranteed of having access to that amount for future investments?

I appreciate your thoughts and input on this idea.

Crystal Smith · Answer

In 3 of the last 5 recessions, home prices DID NOT GO DOWN. Given this fact, the first thing I'd do is find data for your specific community to see how it did during the last few recessions. That's not to say that the past will dictate how the market will act in your area but its data you can use to help guide your decisions.

Regarding maxing out your HELOC without a specific investment in mind, I would not do it unless I found some data on my bank that suggests they may cancel the HELOC. I'd focus on finding an investment that would result in cash flow.

Jaron Walling · Answer

Unless $440 month does nothing to you I would advice against moving that LOC to a bank account.  Would the bank even let you do that?  Hopefully you have an emergency fund for tough times. The COVID-19 panic is damaging a lot of businesses but it's smarter to ride it out in my opinion.

John Warren · Answer

@Andri Grullon you are right that banks can close these down. I checked in with my lender when all this started and he told me that during the last recession banks started tightening the screws big time on HELOCs and a lot of them were shut down. The thing is though, I am not certain you will even have any of those screaming deals to buy in like in 2009-2012. So far I haven't seen any reduction in home values with my listings.  The local Chicago market is still doing fine, and I had several listings go under contract just last week.

I would say just sit tight unless you can deploy the cash from the HELOC. This is a good time to move conservatively.

Eric L. · Answer

@Andri Grullon - you can store the funds drawn from the LOC in a high yield savings acct to cut your interest expenses by ~ 50%.

You could start by drawing what you think you’ll need to close on a home (down payment + closing costs for your target price point) and continue to draw more over the next few months based on market changes.

I have 3 HELOCs and am applying for a 4th, but I only plan on drawing funds when I’m ready to close.

Peter M. · Answer

Seems a little risky to me to do that. How much did it cost to get the HELOC? Youre losing 440/month while it just sits there on the hope youll be able to find a property? I would wait until you have the property picked out before pulling it out. Otherwise you are just throwing it away in interest payments. If the bank closes the LOC before you find something you would only be out whatever closing costs you paid. But honestly I feel like the house would have to lose a lot of value for them to close it. Plus, banks have more to worry about right now than checking in on a 150k LOC. My 2 cents. Or you could pull it all out and short the stock market and make millions....

Justin R. · Answer

@Andri Grullon Banking rules were tightened several years back which now makes it more difficult for banks to call LOCs due. Because of this, they are making requirements harder.

Something to definitely think about in regard to moving your HELOC is taxable interest, and not interest payments. For example you will have to pay tax on the interest received from your bank, but you can NOT right off the interest you are paying for your HELOC once it is draw. With the new tax law you have to source your HELOC expenditures and 1099 Int is not foregiven. Im far from a CPA, so check with yours.

Andri Grullon · Answer

Thanks for your comment Peter and Jaron.

To answer some of the questions, the HELOC is only costing me $60 per year no other charges and I did not pay to have it created. Also I am able to take all the money out no questions asked and there is no fee either just have to pay the interest they’ll be charging me monthly. I agree it’ll be better to take the money out once I’ve found the house and not be throwing away $440 every month. Now $440 would have an affect in my budget I wouldn’t want to lose that money just for the possibility of getting a good deal later.

About shorting the stock market, I don’t trust it enough to invest in it. I feel like real estate is more reliable and we have more control.

Josh Buchanan · Answer

In 2007/2008 I opened a $100k HELOC with Wells. $225k 1st mort on a $450k appraisal. I had it open for a year and had never used it. Recession hit and they closed it with no notice. Fortunately I had no need for the money at the time.

Andri Grullon · Answer

@Eric L. that’s a great idea, I hadn’t thought about putting the money in a high yielding saving account to help with the interest I’ll be paying. I’ll definitely consider that if I decide to move the money outside of the heloc.

Also Cj m I called my Huntington rep and asked her directly if they could close my account her answer was “they shouldn’t close it” but I was not very convinced with her answer. I am not sure if they could close it or not but I feel like if my house goes down in value they just might.

John in my market here in Grand Rapids Michigan houses are still expensive they haven’t come down one bit but who knows the future. I’ve been doing lots of research about the topic and I feel like a lot of people that may lose their jobs are going to be foreclosed one. I really hope for the best but planned for the worst.

CJ M. · Answer

@Andri Grullon

Interesting. I recently when into Huntington Bank where my HELOC is from, and flat out asked them if the line could ever be recinded due to coronavirus, market values, etc. They said no, it's guaranteed for use for the life of the line (which is 10 years). I'll need to go through the fine print of my agreement one day to confirm, but my question to you is, are you sure they could eliminate your HELOC out of the blue?

What would you do if you had an open Heloc

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