# Line of credit to pay mortgage and investment property?



## jmoola (Apr 21, 2012)

Hi, I have a mortgage for $135K @ 2.25% variable ad remaining term is 1 year 3 monthsand another one for 48K @ 2.49% fixed and remaining term is 1 year 6 months and I have a $95K line of credit @ 3.5% available for me. The maximum extra prepayment allowed without penalty for 2012 that I have on the $135K is $37K and for the $47K the maximum allowed is $7K.

I set my goal to pay off this in 4 years and I'm paying $861/week for the $135K and $300/week for the $47K and I'm wondering if it does make sense what I'm doing right now with this plan and whether it would make sense and if it would be a better strategy and will be paying less interest if I pay the maximum allowed for my 2 mortgages from the available line of credit?

The other thing I'm wondering about is real estate investment in an income property and thinking about using $50K of the $97K line of credit available for me for the down payment, also I have a proposal for partnership in a business requiring $20K investment and I'm wondering if it is a good idea to use that form the line of credit as this is the only money available for me. 

I would appreciate you thoughts about this and what would be the best strategy to follow in order to get ahead finciaccialy, sae on interest and enter the real estate inestment market? If you have better suggestions on how to manage this situation, it is very welcome!

Thanks


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## jmoola (Apr 21, 2012)

Hi, I would very much appreciate input from someone on this forum on my situation below. Thanks in advance!



jmoola said:


> Hi, I have a mortgage for $135K @ 2.25% variable ad remaining term is 1 year 3 monthsand another one for 48K @ 2.49% fixed and remaining term is 1 year 6 months and I have a $95K line of credit @ 3.5% available for me. The maximum extra prepayment allowed without penalty for 2012 that I have on the $135K is $37K and for the $47K the maximum allowed is $7K.
> 
> I set my goal to pay off this in 4 years and I'm paying $861/week for the $135K and $300/week for the $47K and I'm wondering if it does make sense what I'm doing right now with this plan and whether it would make sense and if it would be a better strategy and will be paying less interest if I pay the maximum allowed for my 2 mortgages from the available line of credit?
> 
> ...


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## Just a Guy (Mar 27, 2012)

I may be a little confused as to what you are actually asking but, I'd bet your line of credit has a higher interest rate than your current mortgages, so it wouldn't make sense to "pay down" your mortgage with the line of credit. Further, you're not really "paying down" anything by doing this, you'll still owe the money. There is no tax break on borrowing money to pay down a mortgage.

As for using your line of credit to buy a rental or business, that's a great idea, if you buy the RIGHT property or business. I'd suggest you pick up a copy of this book (www.easysafemoney.com/book/) as a beginner's guide to buying real estate. Read the site too, there is a lot of good information on real estate, business, and even lifestyle.

Final note, don't overextend yourself. Partnerships and real estate can be very costly if you don't know what you are doing...I'm concerned that you only have your line of credit available to get money...you'll need a good buffer if you want to get into either industry. 

I consider invested money to be "spent" money. If I need it to live, I don't invest it. If I'm not prepared to lose it, I don't invest it. Once it's spent, it's spent like buying a TV. Of course I don't tend to lose the money, but you have to be prepared that it could happen.


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## the-royal-mail (Dec 11, 2009)

I am opposed to the concept of "borrowing to invest", esp when it comes to partnerships and RE deals. Both of these things need significant amounts of CASH to operate and maintain. In this case I say, you can't afford it.

Focus on paying your own bills and going to work and never mind the shell games and RE speculation.


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## jmoola (Apr 21, 2012)

Thank you for your answers. My line of credit is at 3.5% and I was wondering if paying the maximum prepayment for this year on both mortgages will help me to reduce interest on the long run and shorten the life of the mortgage to below 4 years, and then I'll have the line of credit to pay and hopefully it will stay at 3.5% given the market conditions. Basically with my existign plan I shoudl be debt free in 4 years paying off both mortgages, and I'm wondering if using the line of credit for extra payment will reduce interest and speed the payment period to below 4 years? Is having a line of credit better than a mortgage?


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## Just a Guy (Mar 27, 2012)

Well, if your line of credit is higher interest, then pre-paying a lower interest rate loan will cost you more money.

Look if you owe $100 and pay 2.25% you pay $2.25 a year, if you borrow $100 from me and pay 3.5%, but pay off the first loan, you still pay me $3.50.

There are only Three real differences between a line of credit and a mortgage 

1) a line of credit usually doesn't require you to reduce your principle as part of your payment (the loan is pay the interest only). This can be VERY dangerous as you never reduce the amount you owe, compared to a mortgage where you are paying down the loan (albeit very slowly).

2) When you pay down a line of credit, the credit becomes available to you to use again. When you pay down a mortgage, you have to refinance to access the equity.

3) You can usually pay down a line of credit at any time, in any amount.

Other than that, they are the same.

A line of credit is useful to an experienced investor because of #2. Mortgages however tend to have the lowest interest rates you can get. TD has an option on their HELOCs where you can lock in a portion of your LOC just like a mortgage, but the principle reduction becomes available again as credit. For a primary residence, this can be a useful tool or a dangerous one depending on the person using it.

My advice would be to stick with the mortgage and save up cash if you want to pay down a mortgage, otherwise you're just shifting around debt. Don't get fixated on being mortgage free in 4 years, work on being DEDT free. Highest interest rate first.

I think you need to learn a bit more before trying to tackle investing or businesses...there is no hurry, better to understand it before getting into it. I find it less costly then.


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## crooked beat (Jan 19, 2011)

I believe another difference is LOC is compounded monthly. Mortgage by federal law is compounded semi annually. 

Always ask for the effective annual rate of interest for the mortgage to compare apples with apples.


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