Combatting rising HELOC rates

[Shaun Lloyd]

Greetings all and Happiest New Year!

In 2022, I pulled out a $95k HELOC (Adjustable Rate) as Down-payment to buy a duplex for rental income. However, since the fed keeps raising rates, the payment has gone from $325 to $635 and it's murdering the cashflow of this property. I knew going in to the HELOC process it will probably go up, but looking for a good way out, if possible.

I currently have another property to use as an equity extractor:  $250k value. $55k remaining. 5.75% 30-yr Fixed. Bought '05.

Primary house is recently refinanced last year to 3.5%. $500k value. $137k remaining. Bought '12.

Any options? Creative stuff? Cash-out refinance?

Thanks for your attention! ~Shaun

[Andrew Postell]

@Shaun Lloyd I would absolutely use that $250k property to do a cash out loan.  It will be a higher rate as well but it will keep you in a fixed space from here out.

I am glad you have that other investment property and I think you can see why we try other strategies as well. In case anyone is researching this topic this is basically the classic "should I take out a mortgage or use a HELOC" debate that is usually asked.

To me there's a couple of main points of difference between a mortgag and a HELOC like this this poster's scenario:

1. Lines of Credit have low costs but the rate adjusts

2. Mortgages are fixed Rates but have higher costs

What this means is that a Line of Credit is NOT designed to be a permanent financing solution. 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. Rates are higher now...but what will they be in 5 years? Who knows? That's called risk. Unknown = risk. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC, 10 years later 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 it matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

What HELOCs are designed for is to be a giant credit card. And just like any credit card, you need a plan to pay it back. So if you use it to say....buy another property. Then flip that property...thus paying back your Line of Credit. Then that's perfect! Because you will never get surprised by an adjusting rate or keeping a balance on it. Lines of Credit are PERFECT for people who have a plan to pay it back.

On the other hand, if you were going to use that Line of Credit for the downpayment on a property that you were looking to buy and hold for 30 years....this would be very counterproductive. The 30 year fixed rate loan would be a better fit for this purpose.

You might be able to think of some other scenarios but hopefully this concept is good enough to know the difference between the two. Thanks!