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BT or HELOC?

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Established Contributor

BT or HELOC?

To start with some important criteria:

1) I do not want to open a new account, looking at mortgage shopping within the next 6 months (low inventory where I want to buy so time frame is dependent on when the "right" place comes on the market)

2) I understand the concept of turning unsecured debt into secured debt but I am not worried about job loss and see this as short term borrowing

3) The HELOC is on an income property

4) Individual (and total) utilization will not change if I go the BT route as the card I have a BT offer on has the same CL as the one I would transfer from.

5) goal is to pay the least amount in fees/interest overall

OK now that is out of the way, I have  $5,000 coming off of a promotion. I figure I have 3 options:

A) use a BT offer I have on an existing card that has 0% APR for 12 months with a 3% fee

B) used the HELOC which would be 6% (prime +1%) APR and no fee

C) use some of my DP savings to just pay it off

I have  $500/month budgeted to pay off this debt.

While option C is possible I don't think I will go that route since the "right" house could become available at any time and being in a competitive market having extra cash might make the difference

At first glance I thought the BT would be the best route but when I did a quick calculation it shows that the HELOC route would cost me less in the long run

Does that sound right? I guess what I am looking for is someone to double check my math in case I made a mistake.

Thanks
Scores hover around 800
Haven't been AZEO in over a year
Rome was not built in a day, neither is a good credit profile
Message 1 of 12
11 REPLIES 11
Senior Contributor

Re: BT or HELOC?

- I'm guessing that as you're looking to buy a home in a low inventory market you're looking for extra cash for a down payment to make your offer look as good as possible?

- If soon on the market for a mortgage you're right that you don't want a new account within 6 months of app'ing for a mortgage

- But a HELOC would be a new account, whereas a BT on an existing CC would not be a new account.

- "HELOC" stands for Home Equity line of credit, I've never seen a HELOC offered on a commercial/rental property. You might be able to get a LOC or 2nd mortgage on a rental property but the rate would likely be higher than 6%, and you will have fees of $600 & higher for appraisal & closing costs. I did a HELOC on my primary residence in 2017, the rate is Prime +0% for 80% LTV, but the appraisal & fees were around $600. But it's good for 15 years and has interest only payments.

 

So I think a BT is your better choice.

 

 


Fico 08: 734/716/734 TU/EX/EQ
Message 2 of 12
Established Contributor

Re: BT or HELOC?

Thanks for your reply even though you did not address my question at all.

Both the HELOC and BT card are existing accounts so (as I stated) neither would require opening a new account.
While a HELOC on a non owner occupied property is rare, PenFed offers it and the terms I got when opening it IS 6% (their current offering for this type of HELOC is prime +1.5 last time I looked)

Now that I have addressed your comments, the question I asked still remains unanswered:
Which option will cost me the least overall?
Scores hover around 800
Haven't been AZEO in over a year
Rome was not built in a day, neither is a good credit profile
Message 3 of 12
Regular Contributor

Re: BT or HELOC?

Assuming $5000 debt and $500/month to pay it off, you have your two options:

 

HELOC @ 6%, you'd pay it off in 11 months, with the final payment being 141.67.  Total interest paid = $142.40.

 

BT w/3% fee, for $5000 that's $150.  So a bit more than the HELOC interest.  But it's only $7.60 higher.  So, basically a wash.

 

You could go either/or, but I'd probably go with the BT unless it maxes out your utilization.  Unsecured vs. secured debt.  On the other hand, if something happens and you don't have the $500 to pay, and have to pay less, you could wind up paying interest on the BT, while the HELOC will just keep going at 6% until you pay it off.

 

For those who are wondering why the 6% interest on the HELOC is cheaper than the 3% BT fee, it's because you're paying the full 3% up front, while the 6% interest is annualized and calculated on the balance monthly, so you're paying only 0.5% each month on the remaining balance, which is going down as you pay down the balance.

 

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Message 4 of 12
Established Contributor

Re: BT or HELOC?

Thank you for doing the math and confirming what I found.
Scores hover around 800
Haven't been AZEO in over a year
Rome was not built in a day, neither is a good credit profile
Message 5 of 12
Super Contributor

Re: BT or HELOC?

...for less than a ten dollar difference, I'd go the BT route.

10/01/19 Fico 8: EX 717, EQ 721, TU 742.

Zero percent financing is where the devil lives...
Message 6 of 12
Regular Contributor

Re: BT or HELOC?

I would  go with Option C. If somethings comes up and you need cash, you can just take it out of your Heloc then.

 

 

Message 7 of 12
Regular Contributor

Re: BT or HELOC?

DivorcedAndBroke, I agree with your math, but there is one more thing to consider. The mininimum payment on a balance transfer is usually between 1% and 2%. So rather than paying $500 each month, one can just pay $100  and  deposit  the remaining   $400 into a savings account.  After 11 months (or  whenever the  promotional period of the balance transfer ends) one uses  funds from the savings account to payoff the balance transfer. Assuming the savings account pays 2% interest, one will earn about $37.   So the BT  comes out ahead of the Heloc.

Message 8 of 12
Established Contributor

Re: BT or HELOC?

How are you getting $37? I get $6.68 total from putting $400/month into a savings account with 2% APY.
Scores hover around 800
Haven't been AZEO in over a year
Rome was not built in a day, neither is a good credit profile
Message 9 of 12
Established Contributor

Re: BT or HELOC?

The hardest part is finding a savings that still offers 2% APY 😉

But yeah, if you deposit $400 each month for 11 months, you'll make about $40 at the end. (Rough math: 400×0.02 = 8÷12 = $0.66 per month for each $400, so the following month you'd earn $1.32, and so on)
Message 10 of 12
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