Heloc or not? disadvantages

[Drew Slew]

Theres a lot of HELOC threads, quick q: condo from 150k now is around 220k, second home, BoA seems to offer HELOC for it, could potentially take out 50-60k at 5-6% interest, first 12 months lower interest. Payments seem much less than credit card, student loan payments, and id use it also to purchase another property - w cash savings pooled together.

Any ideas on why I shouldnt do it, or do cash out refi etc? Condo is on great 30yr interest at 3.6%

- non payment of monthly 350-400/m HELOC would cost wont be an issue

- understand its a 2nd lien on the property and bank can foreclose on me

- understand its variable interest rate, but how high will it really go one day? over 10% interest? 

[Andrew Postell]

@Drew Slew these are the right questions to be asking. 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.

Now, I'm not posting this to discourage you from getting a HELOC...but you do want a plan to pay it back. They are not designed to be permanent financing options. Flippers LOVE HELOCs because it's quick access to cash, then they pay it back when they flip the property, then use it again on the next property, pay it back again and so forth.

I hope this helps in some way.  Thanks!