Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Taking advantage of a low HELOC
Old 01-30-2009, 06:13 PM   #1
Full time employment: Posting here.
 
Join Date: Sep 2004
Posts: 607
Taking advantage of a low HELOC

We have a 15 yr loan which at our rate of payment will be paid of in less than 7 yrs. Our loan balance is about 120k and our rate is 5%. We have an untapped 75k HELOC that is currently at 3.5% (variable).

You can probably see where I'm going here. Should we tap some/all of the HELOC to pay down the loan? We opened up the HELOC primarily as a backup emergency fund. We have a pretty decent emergency fund as it as and if need be, we could pay off a 75K loan. Did a quick amort on both the 3.5 and 5 rate and it looks like we would save around 8K (under the huge assumption that the HELOC rate doesn't go up) over the remaining 7 years if we went with the 3.5.

I guess I just feel like I need to take advantage of 3.5. Thanks.
__________________

__________________
WanderALot is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-30-2009, 09:49 PM   #2
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,863
The HELOC rate will go up, maybe fairly steeply, and definitely above 5%. When is always a big question. Does it still look good if 3.5% lasts 2 years and then you pay off the $75k? That's about the max I would bet on.
__________________

__________________
Animorph is offline   Reply With Quote
Old 01-31-2009, 08:26 AM   #3
Full time employment: Posting here.
Lakedog's Avatar
 
Join Date: May 2007
Posts: 654
I did something similar to this a few years ago -- had 8 yrs remaining on a 15 year mortgage (7.5%) and paid it off with a HELOC that had a teaser rate of 3.5% for 12 months. I only did this because I had the cash to pay it off when the HELOC rates increased, and I did pay it off within a year (with a combination of larger monthly payments and savings).

As Animorph suggests, HELOC rates are not likely to stay that low very long so you have to decide if you could live with a higher interest rate or pay it off early using savings.
__________________
Lakedog is offline   Reply With Quote
Old 01-31-2009, 09:00 AM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
I am tempted to do something similar. I have a 2.75% HELOC that could almost pay off my remaining mortgage balance, although I have a shade over 9 years to go at 5%. Thus far, I have resisted temptation, instead watching to see if mortgage rates are going to go low enough for me to refi to another fixed rate loan. But a 2.25% differential in rates is tempting.

If you choose to do this, you are gambling that short term rates stay low long enough to make it worthwhile. The most recent FOMC statement made reference to keeping rates low for an extended period of time, although how many months/years that translates to is anybody's guess. I think that when the economy recovers we will see an inflation surge pretty shortly thereafter, but I also suspect that the Fed will be slow to raise rates because they don't want to choke off a nascent recovery. So it is hard to know how long this will persist. How lucky do you feel?

I have pretty much decided that for me it isn't worth the risk. I already know I will have the mortgage paid off before I am 45, so why take chances? If fixed rate or 5 year ARMs get low enough to make it worth my while, I will refi the first mortgage. Otherwise I will sit tight.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 01-31-2009, 09:50 AM   #5
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,322
Personally, I wouldn't do it unless you planned to pay off the HELOC if rates rose significantly. Also, I assume your projected 8K savings is pre-tax. Depending on your bracket (and state taxes) it could be significantly less after-tax.
__________________
FIRE'd@51 is offline   Reply With Quote
Old 01-31-2009, 11:56 AM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,299
Quote:
Originally Posted by Lakedog View Post
I did something similar to this a few years ago -- had 8 yrs remaining on a 15 year mortgage (7.5%) and paid it off with a HELOC that had a teaser rate of 3.5% for 12 months. I only did this because I had the cash to pay it off when the HELOC rates increased,
It appears to me that this is the only "safe" way to approach this. Else, if the HELOC rates go up - what do you do? The OP mentioned they have the cash to pay the loan also.

But that leads me to this: It is no longer really an arbitrage between the current mortgage rate and the HELOC rate. It is between the HELOC rate and the rate on your cash. Am I looking at that right?

So (back to the OP's numbers), if your cash is paying more than the 3.5% the HELOC charges (seems unlikely), then fine. If not, why not just use the cash to pay down the 5% mortgage? Which would be better?

Of course, if rates stay low, you might not need to dip into that cash - if you use it to prepay the mort it is sunk into the mortgage for certain. But, if you need to hold onto the cash in case rates go up, it's as good as sunk into that investment.


-ERD50
__________________
ERD50 is offline   Reply With Quote
Old 01-31-2009, 01:49 PM   #7
Thinks s/he gets paid by the post
OAG's Avatar
 
Join Date: Jun 2006
Location: Central, Ohio, USA
Posts: 2,598
HELOC's are generaly tied to the prime rate which was 6.5% a year ago. So if the prime went down to 3.25%, where it is today, in a year it sure could go up just as fast once Uncle Ben B decides to start raising rates again. However, he has indicated they will be low for "some time"; whatever HE MEANT by that. Having said that I have a Interest only $100K HELOC that has a current, unpaid balance, of $80K. I will keep it for "some time" as the payoff balance is sitting in 6.25% CD's.
__________________
Vietnam Veteran, CW4 USA, Retired 1979
OAG is offline   Reply With Quote
Old 01-31-2009, 05:09 PM   #8
Dryer sheet aficionado
 
Join Date: Jan 2008
Posts: 36
Some banks will allow you to lock in a variable rate HELOC.You may take a slight hit on the rate,but have the piece of mind knowing that it's fixed.
__________________
liveitup is offline   Reply With Quote
Old 01-31-2009, 10:54 PM   #9
Recycles dryer sheets
 
Join Date: Oct 2007
Posts: 123
I have a HELOC at Prime - 1, I do keep thinking how to take advantage of.

I do not want to hijack the thread, but often I think of buying a small home(often at 60cents to a dollar), which could come handy for downsizing, which is coming up in 3 yrs. We have paid off our present home.

What would you do ?

Regards
__________________
rkser is offline   Reply With Quote
Old 02-01-2009, 07:38 AM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Quote:
Originally Posted by rkser View Post
I have a HELOC at Prime - 1, I do keep thinking how to take advantage of.

I do not want to hijack the thread, but often I think of buying a small home(often at 60cents to a dollar), which could come handy for downsizing, which is coming up in 3 yrs. We have paid off our present home.

What would you do ?

Regards
Could be a reasonable move. The most obvious problems with this strategy are:

- Are you really sure you know where you will want to live in 3 years? A lot can change in that time.
- Carry costs of the house for 3 years add up, unless you rent it. Sure you wanna be a landlord?
- Make sure your current home will sell for enough to take out the HELOC, otherwse you will have to scrounge up some cash.

I keep the HELOC free in part because I might end up using it for investment purposes. If I stumble across a piece of land or a building that is a steal, being able to draw six figures quickly might make a diference.
__________________

__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
tax advantage? Keyboard Ninja Young Dreamers 1 10-07-2008 02:45 PM
Low cost of living town with low humidity? rec7 FIRE and Money 111 09-01-2008 04:59 PM
Wealth advantage workshop SecondCor521 FIRE and Money 8 01-29-2007 11:26 PM
glut of liquidity. low cost of capital. low yields perinova FIRE and Money 3 01-10-2007 05:40 PM
Warm,Low cost of living,No/Low taxes, inexpensive golf & water sports JohnnieRed Life after FIRE 60 01-16-2006 10:54 AM

 

 
All times are GMT -6. The time now is 11:15 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.