Consolidating debt. Is a HELOC the way to go?

Question

Hello BP! I'm a new Realtor in Salt Lake City and I'm curious if you can direct my thoughts or set me straight. 1 year goal of buying my first property, largest obstacle is $35,000 in unsecured debt between my wife and I. Biggest resource is my father in law, he owns multiple properties and is retiring from the military in April 2019. Currently renting his home while he's outta state and will move out as he moves back. My plan is to ask if he'll consolidate my debt in a loan on a HELOC, letting my credit recover and house hacking with family after I move out in April 2019. Is a HELOC my way to go? What are our risks? I'm currently not paying rent, but can the loan payments I give him till April be considered rent and would it help his property get a higher reappraisal? Our relationship is great and we'll be investing together in the future.

Christine C. · Answer

Since your FIL is already a REI, why not find a great duplex/triplex for him to invest in, you broker the deal (collect$), house hack, manage the property ($). Wholesale ($), build your realty biz ($), pay down debt. invest WITH him for a win-win, rather than put all the risk on his home equity.

Andrew Postell · Answer

@Travis Bryant Two of the common areas of concern for HELOCs I see out there is the 10 year maturity date and the adjustable rate. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. With rates moving higher, it is likely that your rate will increase in the future. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC for 10 years it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

If you do use a family member to grant you a loan please be careful of the adjusting rates.  Meaning, have a plan to pay it back quickly or you could be in real trouble.

Matt G. · Answer

I wouldn't transfer unsecured debt to secured debt. Try applying for 0% interest credit cards and doing a balance transfer.

Cherie Orellana · Answer

I’m having a hard time following the story. However if you are not paying rent I think you and your wife should work hard and knock out the debt. I don’t think you should have him get a heloc to do it. This has risk and won’t benefit either of you overall in this situation. It just transfers your debt and increases risk in my opinion. Start paying the unsecured debt down.  The great thing is you can use your commission as your fha down payment to house hack! hopefully you and or your wife have a w2 job in the mean time to help you qualify to buy next year. As an agent they go off your average of the last 2 years income. I alternate every other year having no write offs and lots of income but owing the IRS $10,000 to lots of write offs and getting a slight refund to help with the last years bill. Not sure this is the best strategy for everyone but it works for me to consistently qualify for homes.  I would talk to a lender right now and get their opinion and an idea of what steps you need to take and the best route to get there.  There is a class at the salt lake board called road to 850 that is really interesting and lots of great info on repairing credit and how it all works as well. You also get future continuing education credit for the classes

JD Martin · Answer

I'm also not a fan of turning unsecured debt into secured debt. Exception might be if you had a rock-solid plan and income stream for knocking it out in short order and the spread was significant - i.e. 16-20% interest rates on high balances vs. 5% on deductible HELOC, and you have all kinds of money coming in to get it knocked off in 1-2 years or less.

Chris Levarek · Answer

It depends. :) How quickly can you pay down 35k? What is the benefit of consolidation? Will the interest rates of the HELOC be lower then the interest rates of the current debt? Will the HELOC variable interest rate be an issue if you can not pay down the loan in X number of years?

HELOCs are usually interest-only up front so you would have to pay extra to pay down the loan, minimum payments would not help. On a HELOC at 8% for 35k, thats around $350 dollars in interest only. This would mean paying more then that to actually make any headway on loan pay down. Is this possible?

You might be able to get a better deal by getting a fixed rate Home Equity Loan based on same property and paying down the loan in this way. Fixed is the way to go for that amount of debt in my opinion. This will protect your father-in-law by knowing the principal is required to be paid down and ensure you don't lose out to variable interest rates. Note, my personal HELOC changed interest rates within the first 3 months.

There are additional methods of paying down debt as well so be sure to look at your situation and see if alternatives are available.

For example, I sold my nice fancy new jeep with payments for a paid off used toyota corolla. I then took out a loan on the equity of the used toyota corolla at 4% and paid down any high interest rate debt I had. Now I have a 4% loan that is easy to pay down.

The book "Set for Life" by @Scott Trench has some great tips and is a good read..

Consolidating debt. Is a HELOC the way to go?

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