Last week I was listening to a BiggerPockets podcast and their guest was Clayton Morris from Fox & Friends Weekend. I’ve never seen the show and didn’t know who Clayton Morris was, but it was actually a very good podcast. Clayton’s one of those guys you can tell just by listening to that he’s extremely intelligent and the show was very entertaining as well. After I was done listening, I found his blog online and that led me to an interesting article he posted a while back – “How to pay off your house within 5 years using these awesome ninja tricks.” It involved using a Home Equity Line of Credit (HELOC) to make this happen.
I re-read it a few times and I was thinking that it might even help me in paying off my residence. I mentioned it in conversation when talking with one of my financial mentors the other day and he didn’t give me a yes or no on this, but then he mentioned something real quick that I didn’t think about until later. He said that I should look at if it would make sense to open up a HELOC to pay off my rental house.
I had never thought about that until that moment, but it did get the ol’ noggin’ ticking…
Right now I owe around $35,500 on the rental house and the tenants have paid the majority of the mortgage to get it down that far. I do pay more than the minimum and I’m scheduled to have it paid off in about eight years. When I got the loan back in 2003, I got a 30-year mortgage at 5⅛% which was a pretty good rate at the time. The bank had also previously got slapped on the wrist for breaking the law and was required to cover PMI on new loans, so I didn’t have to pay that either – what a deal!!
So, would it be worth it to get a HELOC to possibly save some money? Let’s find out!!
First off, why not a home equity loan instead of a line of credit? Well, the interest rates are generally higher than HELOCs because you generally get the “privilege” of a fixed rate. The equity loans also require you to pay for closing costs (escrow, title, and recording fees, etc.). A HELOC, on the other hand, usually has lower upfront costs and doesn’t require a formal closing. So I’m going to focus on the HELOC because I think it might be better for my needs with this.
My residence right now has about $97,000 in equity based on Zillow’s current valuation (which is never right, but at least gets us in the ballpark). Most HELOCs I’m seeing right now will let you an 80% maximum loan-to-value (LTV). In other words, you can take the amount of equity you have in your house and multiply it by 80% (or 0.80) to get your 80% LTV. In this instance, $97,000 x 0.80 = $77,600. This is waaaaaaay more that I need, but it’s good to know that I should be safe in getting the line of credit I would need.
From here, there are a couple of options. Some HELOCs have a special introductory rate that goes up after the specified period of time is up. However, these are just teaser rates and might only be for 5 or 6 months before the rates go up a pretty penny. If I was going to be paying this back in a much shorter amount of time (say a couple of years), this might be more important and helpful. The other option is a HELOC without any intro rate and that seems to be the best choice for me based on the duration of payback since it will cost me less over the long haul. As a side note, a good place to get a feel for rates for yourself is on bankrate.com.
Now, if I pay off the loan on my existing mortgage for the rental house, I lose the interest deduction come tax time obviously. On the flip side, the interest on a HELOC is usually tax-deductible for loan amounts up to $100,000 for home purchases and improvements (I’m thinking this would qualify). If so, this would be a wash which is definitely Ok with me.
For our purposes, I’m going to look at using my credit union for the HELOC since their rates are generally lower and I despise the big banks anyway. My credit union is currently offering a 3.5% variable rate. Based on that number, if I kept my same payment, I could get that paid off in seven years… that’s one year sooner than it would take with my current mortgage!!
Sounds like a winner, but…
The biggest problem I have with this scenario is that it’s a variable rate. Paying this loan off in seven years as I mentioned previously is under the assumption that the rate doesn’t go up… but it will. I don’t know how much the rate will go up, but I need to assume that it’s going to go up a decent amount. And I’m the type of guy that really likes that fixed rate… the “known” makes me comfortable.
So is this idea worth the risk?
Possibly. I really want to get my rental house paid off faster because that would give me additional cash flow sooner that I would be able to put toward the mortgage on my residence. And, even if the rate would go up .5% per year, it would still only tack on about another 4 months to my payoff, which would still be 8 months less than my current mortgage.
But boy that variable rate is just rearing its ugly head saying “I’m gonna get you, sucker!!”
I did find one benefit though – I sent the idea over to my new accountant and he’s going to give me some feedback… I’m really starting to like this accountant thing!
Do you think I should go after this and have any of you ever considered using a HELOC for paying off another property?
Thanks for reading!!