Replacing fixed rate with variable

calculator, table, invoice-1156121.jpg
build on rental property
Posted by: bob> Sep 15 2003, 02:59 PM
Hi, your site is very informative.
I would like to ask for advice on this matter. I have a house (let’s call it A) and a rental property (B). B is a 2 on a lot property valued at appx $250K and I rent out the front house for $850 a month. I owe appx. $95K on a 15 yr mortgage (7.25% int) on B with appx 8yrs left (because of some additional principal payments). I was offered a $100K line of equity on A with about a 4% rate. Should I take that and pay off B, then take a line of equity from B for about $150K and build a new house (3 bed/2 bath) in the back of B? My estimated payment to the 2 loans would be appx $1200 a month. My sister would be living in the new house and would be responsible for paying off the loan while I can add the $850 rental from the front to the principal payments otherwise I can always sell or rent it. The new house would probably have a value of $300K + and make 2 houses on B. Do you think this is a good idea or should I try it a different way? Any suggestions or advice would kindly be appreciated. Thank you.
Posted by: loanuniverse Sep 15 2003, 09:32 PM

Lets try to break down your questions and see if I can give you some answers.

First, you want to know if borrowing money at 4% in order to pay a loan at 7.25% is a good idea. Well, it more than likely is not a good idea. I am saying that because I am almost positive that the line that you are being offered is based on a variable rate, more than likely prime. Prime was over 8% as recently as 2001, it would not be in your best interest for prime to go back to its historical levels if you were to get the line.

Then, you want to know if getting a home equity line on the now free and clear B property in order to build another house is a good idea. My answer is: stay away from lines of credit specially for long-term investments. You are leaving yourself exposed to a whopper of interest rate risk. I know the temptation of a 4% rate is high, but so are the pitfalls.

Should you try a different way? If you can get a home equity loan with a rate lower than the 7.25% that you are paying on the house or better yet, refinance the B house with a conforming 15 year loan, that would be better. I am not a residential lender, but talk to one about the possible financing options that you have, but stay away from a HELOC. Does it even have a cap or a ceiling?

The ceiling: is the maximum interest rate, which can be charged on the loan.

The cap: is the maximum interest rate change allowable per year.

Hope this helps

Author: Commercial Loan Underwriter