HELOC variable rate. Should I lock it now?

[Jay C.]

Hi all,

I purchased a rental house back in Dec. at a low interest rate and using a HELOC for down payment and rehab costs. With interest rates rising and those of us with HELOCs with variable rates, what's the strategy that would help a Buy/Hold investor to weather these economy for the coming years? I wanted to do a refi cash-out after my rehab, but that took 2 months longer than anticipated and the rates are not favorable for me to do that. Besides...I'm not sure I could get what I need from a refi cash-out to cover the mortgage (1st lien) and the HELCO (2nd lien).

Details of the financing below:

Purchase price: $255K
Mortgage: 3.0% for 30 years
HELOC: 5% (as of today) for an 10 year interest only payment
Rehab costs: $80K
Monthly mortgage/taxes/insurance is: $2395
HELOC is : $433 (as of today)

I have the opportunity to lock in the HELOC rate 3 times in the life of the Loan, but it would up my expenses.

Here are my options with the HELOC:
1) Interest only – option
30 year calculation (360 months)
Use the current prime rate, add in your margin 1.5 to get the rate, and only look at your Interest portion to determine your minimum payment

2) Rate lock - option
Will be 20 years (240 months) of principal and interest payments
Rate = current prime rate, + your margin 1.5 + HELOC current lock in margin .75

Please offer your thoughts as I'm sure I should lock in at whatever the interest rate is now, but it would up my HELOC monthly payment to $1050 for 20 years. Or should I just pay the interest only mortgage that adjusts with the Prime rate.

Thank you