How to best leverage HELOC??

[Nick Ragland]

Hi Everyone,

I have a multi-family property , renting one unit and living in the other unit. I have a HELOC (50k) and want to leverage, but I'm not sure if I should use part of it as a down payment for another investment property? Or use part to pay down principle on primary mortgage (I owe 217k)? Thanks in advance for ANY advice!

Regards,

Nick

[Greg Scott]

Nick:

A HELOC can be a great way to tap equity to buy additional properties. Since this is effectively a cash-out refi, it is a non-taxable event. HELOCs typically have a balloon so start thinking about doing a rate & term refi at some future point to turn the HELOC into a conventional mortgage.

Not sure why anyone would want to use a HELOC to pay off their personal residence. You are simply trading one kind of debt for another. But, now you are reducing debt on a long-term (hopefully fixed-rate) mortgage and trading it in for a short-term variable rate second mortgage. Even worse, your primary resident mortgage payment does not go down, but now you have a HELOC payment. You are saddled with a higher payments even though you actually did not increase your debt. You also made it that much harder to access cash, should you need it.* Using a HELOC to pay down your personal residence makes no sense to me.

*There was a tenant in our apartment that used to be a homeowner.  He made double mortgage payments every month until he lost his job post recession.    Then, he couldn't make any payments.  You would think that might give him some leniency but the bank still foreclosed.    Paying your mortgage down quickly does not protect you.