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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: blueberrydude on March 28, 2018, 01:44:32 PM

Title: HELOC Advice
Post by: blueberrydude on March 28, 2018, 01:44:32 PM
Hello wise mustachians!

My father passed away in November and, since then, I have been working with my step-mom to get a handle on her financial situation.  There have been lots of moving parts and layers to unfold, but we are getting things done, piece by piece.  I have a question that I thought may be appropriate for this forum and am hoping to find a great answer/resource.

Her house is paid off, but they did have a HELOC in place where they borrowed money to put into a business.  The balance is about $150K and she is currently making interest only payments.  Unfortunately, there is a variable interest rate on the line and she is concerned, and rightly so, about that interest rate increasing and making her payment even higher per month. 

We've been working on paying off her credit card debt and this HELOC is a real head scratcher for me.  Obviously, it would be a better situation if her payments were, at least to some degree, going toward the principal.  She is considering refinancing the debt into a mortgage that would lock in an interest rate to hedge against her monthly payment increasing over time.  This would also allow her to slowly pay down the debt instead of her current situation of paying interest only. 

What say you?  What would you all do in this situation?  Where should we look?  I'd obviously like to find the best rate/terms possible, but I'm also interested to hear what strategies might be applied to this situation.  Any advice helps.  Thanks so much!
Title: Re: HELOC Advice
Post by: Sibley on March 28, 2018, 02:41:35 PM
I'm sorry for your loss. That's rough.

I'm assuming that the debt wasn't cleared with your father's death and there's no way to let it go unpaid because of the house impact. However, if you haven't investigated that route, do so. Refinancing in some way is probably a good idea. I don't believe that HELOC interest is tax deductible any longer with the tax reform that was passed in December, so consider tax impacts as well.
Title: Re: HELOC Advice
Post by: ClovisKid on March 28, 2018, 02:52:49 PM
Yes, I would refinance and take out a first on the home, at a fixed rate, and pay off the HELOC and then pay principal and interest going forward.  The home is at risk with either the HELOC or the first mortgage, so why not lock in the lower fixed rate and pay off the loan rather than incurring interest-only payments until..?
It's a tough situation to be in.  If your step-mom can qualify for the refi and afford the payments throughout the life of the loan, it's the way to go in my layman, un-professional opinion.  I don't know the details of the house value, size, and her fit for it, but another alternative would be to sell the home, pay off the HELOC, and downsize as there's one less member of the household with the loss of your dad, her partner.
Title: Re: HELOC Advice
Post by: frugaliknowit on March 29, 2018, 08:25:38 AM
Does your Mom work?  What kind of income?

What are her assets and liabilities.  I'd prefer she get rid of the debt if she has enough liquidity.
Title: Re: HELOC Advice
Post by: blueberrydude on March 29, 2018, 01:34:54 PM
To answer and clarify some questions:

HELOC is attached to her name, so unfortunately there is no avoiding it.  (On a similar note, a credit card that they owed $7K on was strictly under my dad's name and we are just letting that one go.)

House is paid off.  Worth about $290k.  I'm personally for selling the home, paying off the HELOC with the proceeds and then buying a smaller house with what's left over with the possibility of taking out a much smaller mortgage than the current HELOC (around $150K and interest only).  That seems the rational decision.  But it's also an emotional one, for a few reasons...

My step-mother is 68 and retired.  She owns a commercial building that generates monthly income (although we're going through a sticky situation there too -- previous tenants sold their business and are moving, so we have to find new ones) and she collects SS.  That's her only income.  She isn't in super great health either, so getting a job is not really on the table. 

The CC debt is relatively minor and we've been working through paying that down every month.  It's currently around $8K total.  She's naturally quite frugal and does a really good job of staying under budget (which is allowing us to pay down the CC debt).  She has about $14K in checking and about $54K in an IRA that I transferred to Vanguard for them last year (it was with Franklin Templeton getting hammered with fees). 

She should be able to eliminate all CC debt by the end of 2018 and once we get a new tenant for the commercial building, her income will be more-or-less locked in and doing well.  She's just nervous about the variable interest rate on the HELOC going up and blowing up her monthly budget.  So the (current) priority is to find the best way to refinance, pay off the HELOC, and lock in a low rate. 
Title: Re: HELOC Advice
Post by: frugaliknowit on March 29, 2018, 02:12:03 PM
What's the commercial building worth and what is its net income?  Has she considered selling it and investing the proceeds instead of having the stress and risk of tennant turnover?

I like the idea of downsizing the house.  How large is it?
Title: Re: HELOC Advice
Post by: spicykissa on March 29, 2018, 02:26:35 PM
If she is not in good health, there will come a point where she can't manage the house anyway . . . Is it a good house for an older person with regard to stairs, maintenance, etc? Is it an appropriate size? I understand this is probably a delicate topic, and maybe too soon after the loss of your dad to discuss with her, but it bears some thought. It would suck to get everything all locked in just in time for her to have a health crisis and need to move ASAP.
Title: Re: HELOC Advice
Post by: dragonwalker on March 30, 2018, 12:54:43 AM
Speaking from my experience working at the bank you should check now to see if there is an option on the HELOC to fix the rate. Many HELOCs have this little known feature that will permit you to fix a portion or all of the balance. Keep in mind the interest rate will usually be fixed at a higher rate but again it's another option and will take away the concern your step-mother has on the variable interest rate.

With what you said regarding her health the downside of refinancing and getting a traditional fixed rate mortgage is that her payments may possibly be higher.
Title: Re: HELOC Advice
Post by: dogboyslim on March 30, 2018, 02:32:49 PM
House is paid off.  Worth about $290k. 

No, the house is not paid off.  Your proposed approach is sound, but you need to stop thinking of the house as paid off.  It has a 150k mortgage.  Nothing in your actions or proposals feels off to me, but this statement seemed punch worthy.
Title: Re: HELOC Advice
Post by: blueberrydude on March 31, 2018, 06:12:21 AM
Following up:

The commercial building COULD be sold, but that would eliminate most of her income and leave her to manage a lump sum, which I think would be more difficult for her than a steady income stream that she can budget.

The house isn't huge, but it isn't small either.  Apart from the emotional impact of selling and moving out of "their" house, there is another family member with two kids currently living in the house with her, which obviously makes things more sticky/emotional.  Again, I think the best decision is to sell the house, pay off the HELOC, and move to a smaller, more manageable place.  I have delicately brought that up, but it seems to overwhelm her immediately. 

At this point, she wants to re-finance and lock in a lower rate.  What are our best options for shopping that around and getting the best terms?  She is more comfortable with traditional brick and mortar banks, but I want to make sure we're examining the best opportunities.  Where should we look?