Refinanced to an Investment Equity Line of Credit

A month ago our real estate mortgages/debt/leverage looked like this:

Property	Financing	Current Balance	PITI
Rental Property #1	5.63% 30yr fixed mortgage	$ 110,900	$ 1,030
Rental Property #1	HELOC 3.25% variable APR	$ -	$ -
Rental Property #2	6.50% 30yr fixed mortgage	$ 95,200	$ 820
House #3	5.8% 30yr fixed mortgage	$ 87,400	$ 820
House #4 (Primary)	4.875% 30yr fixed mortgage	$ 239,500	$ 1,500

We already have a short term (less than 1 year) plan to sell Property #3. The plan is to put any equity gained from the sale of the townhouse into paying down Rental #2's mortgage.

Given our shift to a single income (with my wife staying at home, working a few hours per week) our monthly cash flow has gone down to an uncomfortable level for us given our monthly expenses. Even after we sell property #3 I'd still like to be in a more comfortable postion.

After looking at our loans, its clear to me that we need to focus on the 6.5% mortgage on Rental #2. It has the highest interest rate, and the smallest loan balance. By eliminating this monthly payment (or reducing it significantly) we will be in a much better postion for any unexpected events in the future. It would mean an extra $600-$700 in monthly cash that today is today allocated to this mortgage payment.

So we looked at our options and opened an Investment Equity Line of Credit (IELOC) on Rental #2. The total costs for the loan were less than $450 at our local credit union. The variable rate for the IELOC is set at pime + 1 (currently 4.25%). We paid off the 6.5% 30 yr mortgage by maximizing our HELOC on Rental #1 (with the lower rate) and taking the remaining balnace from the new IELOC. Given our plan is to pay down these loans signifcantly in the next year, I am not as concerned about the variable rate and see an opportunity in the short term to realize significant interest expense savings.

Here is what our loans look now look like:

Property	Financing	Current Balance	PITI
Rental Property #1	5.63% 30yr fixed mortgage	$ 110,900	$ 1,030
Rental Property #1	HELOC 3.25% variable APR	$ 25,000	$ 60
Rental Property #2	IELOC 4.25% variable APR	$ 70,100	$ 856
Wife's TownHouse #3	5.8% 30yr fixed mortgage	$ 87,400	$ 820
House #4 (Primary)	4.875% 30yr fixed mortgage	$ 239,500	$ 1,500

A couple benefits from these moves I'm expecting:
1) The amount of interst we are paying will go down allowing for quicker loan balance paydown.
2) I can use our cash savings (including emergency fund) to help accelerate payoff of this mortgage (since we can pull it back out if needed).
3) Additional flexibility with the LOC for future opportunities or emergencies when cash is needed.
4) No more escrow on Rental #2 - I will be able to handle taxes and insurance without escrows so a little extra cash I can earn interest from going forward.
5) As we paydown the balance on the LOC our required monthly payments will reduce adding flexibility if needed for cash flow.

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Comments (13)

Good call in trying to sell one of the properties to thereby increase cash savings and decrease the interest you pay to the bank on your loan. Seems like way too much leverage in real estate given your total assets, especially with only one income. If you get fired at work, it's going to be a very bad scenario unless you can unload some of these properties.

Posted by Steve | August 31, 2009 7:27 PM

Well that has been our intent even before we bought our new home in December. We never meant to keep the townhome, however due to other circumstances we have still kept it with plans to sell it. I never considered it a property we wanted to hang onto.

Posted by 2million | August 31, 2009 8:36 PM

I'd wait 2million for 5 years until the market returns. I think you'll kick yourself for selling at current levels in the future.

Why not ask your wife to go back to work? Or better yet, why not have her be your blog master and make big bucks like other bloggers? :)

Posted by RB @ Financial Samurai | September 1, 2009 1:31 AM

You might want to be a bit cautious about using your emergency fund to pay down your LOC. There have been increasing occurrences of financial institutions severely reducing the lines of unused LOCs and you could find your ability to pull the reserve back out disappear without notice.

Posted by Ren | September 1, 2009 12:05 PM

It's amazing to me that somebody who has more than half a million in net worth would still have worries about cash flow. I always thought that by the time I have $500,000 in cash and cash-like accounts, all my money worries would go away. But I guess cash flow considerations will always stay - until you have enough to retire on, anyway.

What's an IELOC - or is that a typo for HELOC?

Posted by DoneToZen | September 1, 2009 1:00 PM

IELOC - Investement Equity Line of Credit

Yes its not that we have cash flow problems, but I have gotten comfortable with a nice amount of free cash each month to allocate. Now that we are down to a single income, we still spend less than we earn, but if I were to lose my job things would unwind quickly after our emergency fund cash ran out. Id like to be in a position that we could manage for a couple years without significant balance sheet changes.

Posted by 2million | September 1, 2009 9:07 PM

As I've mentioned before, you're exposed to (US) equities both via your accounts and your (single) job. The rest of your exposure is in US real estate which is highly correlated with stocks. This correlation will only increase going forward as both markets are being fed from the same Fed (pun intended). All this with x2 leverage ($500k NW, $1mil Assets). Not only you have all your eggs in the proverbial single basket but (via x2 leverage) you have other people's eggs in the same basket too. De-leverage and diversify, please.

Posted by hf12358 | September 2, 2009 4:59 PM

2Million,

I sincerely hope that this move works for you. This is a risk that I would NOT be comfortable taking. Yes you decreased your rate, BUT, you did so by changing from fixed rate to a variable rate.

I realize you probably will be okay, but, this is the type of thing that gets many people in trouble. Now the monthly payment is lower, and thus they spend the extra money instead of paying down there debt. Then there income goes down and interest rates go up.

Good luck,

David M

Posted by David M | September 3, 2009 5:16 AM

2Million,

I would like to learn more about IELOCs but I'm having a hard time finding any real info. Any links you would recommend?

Posted by Neil P | September 4, 2009 10:32 AM

2mil - I have to reiterate David M's comment about going from fixed-to-floating rate. The IELOC (what's with the fancy name? :) payment can likely double as rates kick up with the government inflation stimulus. I still wish you'd sell some taxable brokerage and knock out some debt. I think you're over extended. I'd also cut back any and all stock market investments going forward.

Posted by CPA1298 | December 18, 2009 12:55 PM

I feel very comfortable with this approach now. As I mentioned a shorter term goal was to pay down this loan to improve our monthly cash flow. By changing this to an adjustable equity line we have been able to throw additional cash each month at this debt. Our IELOC balance is now down to less than $25,000 and is at a very manageable level.

Posted by 2million | December 19, 2009 10:15 AM

Can you share the bank where you got your IELOC? I've been searching and been having a hard time finding one doing them in this economy. Not doing them for me... I have excellent numbers, but doing them at all.

Posted by Chris | March 4, 2010 7:52 AM

Chris - sure we got our IELOC at Coastal Federal Credit Union.

Posted by 2million | March 4, 2010 9:04 AM