Taking advantage of a low HELOC

[WanderALot]

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.

 

[Animorph]

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.

 

[Lakedog]

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.

 

[brewer12345]

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.

 

[FIRE'd@51]

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.

 

[ERD50]

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

 

[OAG]

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.

 

[liveitup]

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.

 

[rkser]

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

 

[brewer12345]

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.