Changing LOC to Mortgage Possibly... Need Advice

[Millions]

Hey everyone,



I have some family members who are not the best at managing money. They already owned their house outright but took a LOC and spent $100K on more or less useless things like stocks that went bad, basement renovation, etc.



So now they have a $100K debt on LOC at 3% interest (variable prime). Not bad but in the past 5 years they have not paid it down at all. Just the interest.



They are retired with a pension.



I have since recommended that they look into getting a $100K mortgage instead so that it forces them to pay it down as it doesn't seem like they will do it on their own.



They seem inclined.



I'm thinking with a $500K house and only a $100K mortgage, they should be able to get a great rate. Maybe 3% 5 year fixed or something.



So my questions are:



1: Is this a smart move to make for them?



2: If it is, what do you recommend as a mortgage and a rate given that they are only borrowing 20-25% of the value of their home.

 

[Thomas Beyer]

A mortgage and a LOC are very similar. A mortgage is usually a bit cheaper as it has to be reduced every month. The mortgage rate is also fixed, usually for 5 years. A LOC can be increased or decreased, and its rate can fluctuate. It is more flexible. At their age, I'd opt for flexibility, as they have a low rate already and it will likely not go up for quite some time.



3% is a good LOC rate.



Not changing the LOC to a mortgage is the right thing here in my opinion, but financial discipline is required. 100K mortgage on a 500K house is not so bad.



[quote user=Millions]useless things like stocks that went bad, basement renovation, etc
Why is this useless ? A renovated basement adds value to the house and it is useful.

Stocks can be good or bad. Like real estate. It is not always a winner. One needs some skills to invest either !



What is the goal here ? Be debt free ? Then start paying down the LOC by $1000/month, say, and in 8 years it is gone. Investing the cash ? Then there are three options:

• learn it, follow a system (i.e. do it yourself),
• invest with someone else or
  hire a good financial planner.

Here's what I (and others) do, besides income producing real estate, such as covered calls, spreads: http://myreinspace.com/public_forums1/General_Discussion/61-8913-What_else_do_you_buy__besides_Apartment_Buildings.html

 

[mortgageman]

It depends on their retirement income and what their plans are for the property.

The HELOC will give them maximum flexibility for managing their household cash flow and they can pay it off without penalty if they downsize.

A mortgage with a 30 year amortization will have higher payments, a lower rate, and could potentially cost them a pay out penalty if they sold before the term ended and didn't port the mortgage to a new property.

They might go with a one or two year term to get the lowest fixed rates and minimize a potential payout penalty.

 

[Millions]

Yes - a developed basement may be a good thing but NOT if it's paid for with an LOC that you're never going to pay off. That's border-line retarded.



I agree with the $1000 per month thing but considering they haven't done that for the last 7 years, it's doubtful they are going to start. They spend 100% of what they earn now, without a mortgage, so that would be difficult.



They do have about 40,000 in RRSP's so personally, if it were me, I'd take out as much as I could and use that to help pay it off. Not much point in having investments if you have high debt.



They also have 15,000 in stocks (was $30K but they lost half) so selling those might be the better option as well, since they paid for those with the LOC as well.



As you can see, they are not very smart with money and don't seem to be getting any better. They are considering selling the house and buying something smaller - and using the extra money to pay off the LOC.



With that and a job to go with the pension, they could potentially pay it off in 1-2 years and then close it off so they don't spend it again.....