Author Topic: HELOC... kill it? manage it? sell it?  (Read 4784 times)

tammyLav

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HELOC... kill it? manage it? sell it?
« on: June 06, 2013, 08:43:44 PM »
So I have been following MMM for a little while now and have made great strides towards a better financial future. Dh and I have been rapidly picking off debt, and are down to our last credit card, my student loans (which are only at a 3% interest rate, so not planning on killing myself to pay off... would rather invest that $), a mortgage, which we have an awesome interest rate on (2%... the result of a financial melt-down due to layoffs and a scary ride that thankfully led to an interest rate reduction), and finally a HELOC. The HELOC allowed us to get the home without a down payment. In hindsight, I would not have done things this way, but neither dh nor I have parents who were able to give advice on this topic, so we unfortunately learned the hard way :(  I can only work with what we have, and trying to move forward with this now that things seem to be flowing in the right direction.

So here's my question.

Credit card: I know I have to pay it off asap. 10k on it. Plan to have it gone by Christmas.
Student loan & mortgage: Due to better interest rates (3% and 2%), I plan to just keep these going while I build our investments
Car: paid off
HELOC: Dh and I are planning aggressive financial changes.  I can't decide if we should be holding onto this house for dear life due to it's insanely low interest rate, or trying to sell it when the market recovers to get rid of that HELOC. It's rate is 3.5% now, but I know it's a matter of time before it goes up.

Mortgage: 215,000 at 2% interest. 30 year fixed (9 years in)
HELOC: 60,000 at variable interest

I would love to pay the HELOC off, but that's a whole lotta money to come up with... money that if I were killing myself to get ahold of, I would so much rather be putting into investments! Once the card is gone, we will accelerate principle payments... but if we sold the house (in a few years) for a profit, the HELOC would be gone all at once and we could get into another house (in my mind, preferably something with rental income potential) with a down payment. But then the interest rate would, no doubt, not be as good! arrgh! I start going in circles when I think about it and i need someone with better financial chops than I to advise :)

If you were planning out the next 5 years or so, what would you do in my situation?

tammyLav

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Re: HELOC... kill it? manage it? sell it?
« Reply #1 on: June 06, 2013, 09:00:52 PM »
I wanted to add that what I would love to do, if we could work it out, would be to get rid of the HELOC and keep this house to rent. The mortgage is 1,300/ month and comparable properties rent for approx to 2k/month (we are a reasonable commute to NYC with easy access to public transportation). I've heard renting properties in NJ is a nightmare though, due to laws that are unfavorable to landlords. This makes me a little nervous. I don't know if this last tidbit of into is helpful or not, but I know mustachians provide incredibly spot-on advice, and I really want to know what you think...

Self-employed-swami

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Re: HELOC... kill it? manage it? sell it?
« Reply #2 on: June 06, 2013, 09:09:10 PM »
How did you take out a HELOC on a house, for use as it's downpayment? 

tammyLav

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Re: HELOC... kill it? manage it? sell it?
« Reply #3 on: June 06, 2013, 09:16:55 PM »
It was an 80/20 mortgage with no downpayment. We were dumb... I'll admit it. But That's how we got the HELOC (If there was an embarrassed emoticon, I would use it here :)

Self-employed-swami

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Re: HELOC... kill it? manage it? sell it?
« Reply #4 on: June 06, 2013, 09:22:07 PM »
Ah.

That makes sense, I guess.

I'd try this http://www.whatsthecost.com/snowball.aspx and follow it's recommendations.

tammyLav

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Re: HELOC... kill it? manage it? sell it?
« Reply #5 on: June 06, 2013, 09:30:03 PM »
It did at the time.... though I'd love to go back in time and throttle myself. We weren't trying to be greedy, but had hoped to sell the house and use the profit for a proper down payment on the next place. This house increased in sale value by 100k in the span of 2 years. I know the guy we bought it for 290,00 from paid 180. We weren't thinking it would make that much, but with improvements, we were hoping for maybe 30k.... which, of course, did not happen. Easy to see a bubble in the rear view mirror, I guess. On a brighter note, real estate around us seems to be rebounding, and it is at least worth about what we paid for it. We really like the house and neighborhood, so really the only reason I would sell it is for a boost in the right direction financially. (and I definitely don't mean a bigger house... just a smarter purchase)

Thanks! I'll take a look at that link.
« Last Edit: June 06, 2013, 09:32:25 PM by tammyLav »

gooki

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Re: HELOC... kill it? manage it? sell it?
« Reply #6 on: June 06, 2013, 09:41:57 PM »
Once the card is gone, we will accelerate principle payments...

Why accelerate principal payments? If anything accelerate the HELOC payments (higher interest rate), but not the principal ones (unless your paying PMI).

If you've got a tight control on your spending - why not invest all your spare cash. If you find the HELOC rate rises to a point it becomes an issue, cash up some of your investments and pay it down.

The good this is you don't have to make a decision today on this. The only thing you need to do is keep you expenses down and start investing so when the time comes, you have multiple options to choose from rather than a single forced option.

tammyLav

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Re: HELOC... kill it? manage it? sell it?
« Reply #7 on: June 06, 2013, 09:48:23 PM »
I'm sorry, I meant the HELOC rate, not the principal.  I like your point about building up investment while the HELOC isn't a problem, in order to create a cushion so we can be more methodical.

SnackDog

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Re: HELOC... kill it? manage it? sell it?
« Reply #8 on: June 07, 2013, 02:16:31 AM »
Your mortgage and Heloc rates are extremely low. You are certainly going to exceed those in investments long term, so pay them off as slowly as you can.

Sweet Betsy

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Re: HELOC... kill it? manage it? sell it?
« Reply #9 on: June 07, 2013, 06:57:20 AM »
If you like the house and the location, I don't personally see the point in planning on selling it a few years down the line.  If you are planning on staying in the same general location you'll end up paying any uptick in home prices that you get from selling the current house back into the new house.  You'll also pay any selling fees (even if you sell it yourself you'll pay some fees) plus all the extra money that goes into a new house (and yes, there will be things you'll need to change or fix in the new house).   All that said I just don't see how you'll be better off financially selling your present house and buying a new one. 

I am very financially conservative and highly value low debt so my action plan would be to:
1) kill that credit card debt as quickly as possible
2) kill the variable rate HELOC
3) start investing while continuing making minimum payments to mortgage and student loans

To me, the variable rate with the HELOC is a ticking time bomb.  Interest rates are going to rise...you might as well get your balance down as fast as you can now while interest rates are low. 

Do you have an emergency fund?  If not, I'd recommend concentrating on building that up once you get your credit card debt paid off.   

tammyLav

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Re: HELOC... kill it? manage it? sell it?
« Reply #10 on: June 07, 2013, 09:48:16 AM »
Excellent points. We do have a small emergency fund (3k). Not as much as I like, but we can handle little emergencies (like our water heater dying last week) without it causing a hiccup. I think it makes sense to build up more of a cash reserve by investing aggressively in something I can access quickly as needed (after getting rid of that last credit card, or course) while the HELOC rate is low. But then, when it inevitably rises, we can either pay it off with investments or pay it way down, depending on how much is in there when that happens. I completely see Betsy's point about staying put. Our house is tiny, but we have just as much space as we need, and thanks to a MMM adjustment, I don't ever have a plan to trade up to something pricier. I just wasn't sure If selling the house for a profit would help us get out of the HELOC more quickly. You are right though, that I would just be trading debt from one thing to another. Thank you for the sound advice! I don't really have anyone to discuss this with, so I can't say how much I appreciate your help!

tomsang

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Re: HELOC... kill it? manage it? sell it?
« Reply #11 on: June 07, 2013, 04:48:40 PM »
What's the credit card interest rate?  Can you do a balance transfer and lower the rate?  MMM has links to low rate CC's for transfers.  Also, based on spending, short term job security, etc. it might sense to use the $3k emergency fund to pay down the cc.  If an emergency pops up then use the cc to pay for it.

Sounds like you are on the right track.

Good luck!

Tom