Should I keep HELOC Variable Rate or a Fixed rate with less cash flow?

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Topic Author
finestlittlemexican
Posts: 5
Joined: Thu Sep 03, 2020 1:47 pm

Should I keep HELOC Variable Rate or a Fixed rate with less cash flow?

Post by finestlittlemexican »

Hi all,

I purchased a rental house back in Dec. at a low interest rate, 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 tool 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: 5.5% (as of today) for an 10 year interest only payment
Rehab costs: $80K
Monthly mortgage/taxes/insurance is: $2395
HELOC is : $507 (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 + 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 $1200 for 20 years and eat into my cash flow
Thank you
Last edited by finestlittlemexican on Thu Aug 04, 2022 10:42 pm, edited 1 time in total.
petulant
Posts: 2221
Joined: Thu Sep 22, 2016 1:09 pm

Re: Should I keep HELOC Variable Rates or Fix a rate with less cash flow?

Post by petulant »

Can you just try to aggressively pay down the HELOC?
Topic Author
finestlittlemexican
Posts: 5
Joined: Thu Sep 03, 2020 1:47 pm

Re: Should I keep HELOC Variable Rates or Fix a rate with less cash flow?

Post by finestlittlemexican »

That's plan B, with the rents that are coming in.
The Fed seems bent on hiking rates for the foreseeable future and if we get stuck in a recession, I'm trying to see if a fixed rate with lower cash flow is better than a variable rate with higher cash flow.

If anyone has a spreadsheet to figure this out, I would be grateful.
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