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Banking and Financial Question on Investment Property
Old 11-09-2008, 09:34 PM   #1
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Banking and Financial Question on Investment Property

A buddy of my asked for an opinion. Please give some advice.

he still owe $200k on a investment property which have an interested rate fixed for 30 yrs at 6.38%. His bank on his own personal home offer a HELOC home equity line of credit at 3.5% (or prime minus .5% for life) ammoritize at 15 yrs.

What this mean is that he can pay-off his investment loan but carry a line on his personal home and it will gives him an additional ~$350 extra cash....

1) good idea or bad idea?? why? (detail please, and no 'go ask an accountant')

2) he's not hurting for $350 but it's hard to resist at 3.5%, is this a dangeruous move?

2) what's the chances of prime rate going up to say 6-7%

thanks all

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Old 11-09-2008, 10:00 PM   #2
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Look at the history of the Prime for the last cycle. It climbed fairly quickly. Look at the history of the Prime over 30 year cycles. It gets over 6-7% often. If your friend doesn't need to payoff the loan over 30yrs and can be flexible about paying down debt quickly, such a move could payoff, but it seems risky to me.

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Old 11-09-2008, 10:48 PM   #3
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Your friend wants to take on extra risk in this economy?

Your friend wants to take on variable rate debt when variable rate debt has been putting people into foreclosures as rates went up higher than they could afford?

Your friend wants to take on a HELOC when many banks have been freezing, reducing, suspending, and eliminating HELOCs?

Your friend wonders how likely prime rate will be in the 6 - 7% range when it was over 8% for almost all of last year?

I would tell your friend Good luck! ... and keep your fingers crossed!
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Old 11-10-2008, 05:02 AM   #4
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Depends. Depends, if rate rise quickly, as mentioned here (which IMO will not happen this time), could he pay it off quickly, before it exceeds his current 6.38% amortized 30 years loan? If he could, why not? Personally, I did the same thing, when the prime was 5%, as I had an "investment" that would pay 5.8% (and now the next adjustment will be, for my HELOC either 3.5% or 3% - and yes I could pay it off today if I had to which I would if Prime goes over 6.3%. Ours is Interest Only, 15 year term, and we have withdrawn (used to line) to close to the limit; so freeze it, if they like, it will not impact us. Seems to me the prudent use of a HELOC is good personal financial economics - if you are careful and do not go overboard. Better than most debt as it has the added benefit of the interest being tax deductible.

OP: I just hope your "friend" can act quickly, if and when necessary, or he/she could be in a worse situation than they may be now. Finding an extra $350 a month is good but be sure they look down the line about 5 to 10 years and consider the potential bad as well as the good consequences of what is contemplated.
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Old 11-10-2008, 08:42 AM   #5
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I am always squeamish about putting your home on the line for a business debt. Let the investment property carry its own debt. Plus, the rate is a good fixed rate and has certainty.

No more lawyer stuff, no more political stuff, so no more CYA

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Old 11-10-2008, 11:32 AM   #6
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Yeah, I'ld keep the 6.38% fixed rate ... rates will not stay this low.

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