Follow Us on Social Media

email icon rss icon linked.in icon google plus icon twitter icon facebook icon

HELOC’s are Back – Should Investors Use them?

by Tracy Royce on February 1, 2014 · 17 comments

  
HELOC

As home prices have risen, the return of the Home Equity Line of Credit (HELOC) has followed.

They’re not easy to get, but anyone involved in real estate (or read the newspaper since 2008) may treat them with a new sense of respect…or fear.

Many homeowners and investors made the critical mistake of over-leveraging themselves during the last housing bubble, find themselves years later upside down in equity, facing foreclosure, or needing to short sale.

For the first 9 months of 2013, new home-equity loan activity rose almost 31% compared with the same time period of the year before. The data collected was published by Inside Mortgage Finance recently, a mortgage industry publication.

To put it in perspective, in 2006, the LOC activity was at a high of $430 Billion dollars. In 2013, the volume is supposed to be around $60B, a fraction of that in the bubble, but still the highest since 2009.

As far as year over year growth, Equifax and Moody’s Analytics expect growth of 5-10% in 2014 from 2013, but not as much from 2006-2007. They note that the market recovery is still in the early period, and that there are millions of people nationwide still underwater.

Lenders are understandably more hesitant to issue these loans. Getting one and closing one is difficult, and many lenders will not a allow a combined loan to value (LTV) of over 80% of the homes value. Depending on when you bought or where the home is, you may not have 20% equity in the house yet to even make a HELOC an option.

If you do, should you use it?

What’s it good for?

In many cases, granting a HELOC during the housing bubble was much like an irresponsible parent handing a credit card to a conceited adolescent. A false sense of entitlement, fictional wealth, and little stated caution make for a dangerous combination to the dollar-struck homeowner or risk-taking investor.

Many a guru unveiled the ingenious plan for making massive amounts of wealth – leverage your current assets to the hills and buy more. You tell me how that turned out.

To the other effect, some homeowners use HELOC’s for home improvements, funding for small business’, and consolidating debt. Interest rates on HELOC’s can be better than those from the SBA (if you could get one), credit cards, or other personal loans. Also, the interest can be tax deductible.

When used and monitored responsibly, Lines and Loans of this nature can be tapped into for strategic investments, whether it be a business or property.

Knowing What You’re Signing up for

When lenders were giving money away like candy, why read the fine print? The fallacy of self-confidence in a rising market stranded millions upon millions of people up the creek without a paddle, and all of the sudden we saw who was swimming naked.

As savvy investors, you know to read the details and see what the possible recourse is. You’ll want to see if what you’re getting is a line of credit, or a loan, and which is best for your needs. What the rate is tied to, and how often it can change. Also, if there’s a pre-payment penalty, and the amortization schedule.

In the worst case scenario, you’ll need to know what your options are. If you end up in foreclosure, and need to short sale, the deficiency rights on line of credit may change, depending on what you used the money for. If the money was used for vacations, cars, and other consumer spending, you may be looking at being on the hook for quite some time.

I’m not an attorney, and it may be different in your state, but simply said, it’s something to take into consideration should the house go into foreclosure.

Prime Rates Going to Rise in 2014?

HELOC’s and Home Equity loans are nearly all tied to the Prime rate, which is based on the federal funds rate, which is set by the Federal Reserve. Any changes made by the Fed have a far-reaching effect by having influence the borrowing costs of banks in the overnight lending market, and subsequently what banks can offer us on products like savings accounts, CD’s, and money market accounts.

The market sat in anticipation earlier in January on the news that the Fed may ease their bond-buying program, which has been at the rate of $40 billion per month, down to $35 billion. This showed confidence from the fed that the economy will improve, but also said it will likely keep the short-term rates (like Prime) down until they see the economy is in full-blown recovery.

They’re willing to risk inflation later down the road to hold rates where they are, which could fare well for investors and homeowners that want to take advantage of the historically low prime rate for awhile.

Where it could go in 2015 and beyond is anyone’s guess, but for the foreseeable future, it appears prime rate (and therefore HELOC and Home Equity Line rates), will be very low.

Do you think it’s still a good time to try to tap into equity and use these types of loan for your real estate/other business’? Or buy more property? Or do you steer clear of these types of loan now?

The best part of these articles is your feedback and participation. Please like or share this article on your social network and keep the conversation going!
Photo Credit: Refracted Moments™

Email *
  



{ 17 comments… read them below or add one }

Lear February 1, 2014 at 1:02 pm

I’ve had the exact same question on my mind. I learned that when I asked about getting a HELOC, I could only use my current residence. That did not allow me to access the additional 40K in equity in one of my rental properties.
Am I able to access a HELOC for my rental property? does anyone know?

Reply

Tracy February 1, 2014 at 2:31 pm

You can speak to a local lender and see if it’s something they offer. The bigger question would be, what are you using it for? And is it worth leveraging your home for ___?

Reply

Amy February 1, 2014 at 1:20 pm

interested in new comments

Reply

luke February 1, 2014 at 2:24 pm

I am very interested to see what people have to say about this. I am trying to figure out if this would be a good option for me…..

Reply

Mark Ferguson February 1, 2014 at 5:16 pm

I just paid off my first rental I bought three years ago. I am getting a HELOC on it now. It was with my portfolio lender. Terms are 2% above prime variable rate, 36 months, 1.5% origination, appraisal required on over 100k line, 75% loan to value. I am using it for buying new rentals/short term financing on flips.

I got a line of credit with them on my personal house last year. 90% loan to value, 1% above prime, total fees $28.

Reply

Cheryl C February 1, 2014 at 10:04 pm

I think that they are great if used in a proper manner. I used to have a bunch of them. A stack of checkbooks. When things were in the tank, I maxed out 3 or 4 in late 2008. I saw the “writing on the wall”. In early 2009 mine were cancelled or frozen – but I had a bunch of dough in the bank to take quick action on a great deal. There is now a class action suit against BOA for doing this – granted they were not “called”. I don’t expect much, if anything.

One great thing is that you don’t pay interest on money not drawn and if I can get some now I will. These are terrific for flips – no closing costs at settlement, pay only while you are using the money, show cash on your offer – for buy and hold, I switch to commercial at closing.

It’ also nice to have that $$ available as a back-up if you need cash for something. I would see no reason to close one out before the early payment penalty.

Reply

Roy N February 2, 2014 at 4:47 am

80% LTV on a HELoC would create another useful avenue to a cash-out refinance strategy. Here in Canada, retightening of lending rules in 2012/2013 have seen HELoCs limited to 65% LTV. Additionally there are few lenders willing to take a HELoC on a rental property – which has required us to plan on moving our mortgages on maturity {5-yr terms}.

Reply

Dave Tanner February 2, 2014 at 6:26 am

I was able to pay off my primary a while back and now strategically have a HELOC on it (70% LTV=prime+0 which is 3% in my case and deductible interest!). Here are the advantages of having a sizable HELOC in my experience.
1. I can now submit CASH OFFERS of on houses- that moves your bid up to the top of the stack.
2. I can do the repairs and improvements on the HELOC, 3-5k usually for my stuff.
3. Once done and rented, THEN get it financed! Lets say I spent 50k for the house and 5k for the work=55k on my HELOC plus minimal closing costs. If I snagged a good buy this will now appraise for at least 65k. My bank only requires 15% DP. At closing I will get a check for 55,250 (give or take) which pretty much wipes out my HELOC account to zero. Rinse and repeat, a modern day no money down (sort-of).

The difference should be clear. With the HELOC my cash offer would have got the house compared to equal offer contingent on finance. I avoid the extra closing costs and CC rates. In the end all the house expenses are wrapped up in the house, not out of my pocket (100% financing in a sense). In theory on would never run out of money to buy houses if they continue this properly. To me this also answers the question of should I pay a little extra on all my houses or pay off 1 of them 1st. Get ONE paid off then you can write cash offers and large checks using a HELOC. This has worked well for me, but I’m disciplined. If you impulse buy expensive crap you don’t need, do NOT get a HELOC it will ruin you. It would be too tempting to know you could write a check for $70,000 or so. I could see many ppl spiraling out of control with that ability.
Thoughts?

Reply

Ryan Swan February 25, 2014 at 1:59 pm

Sounds like a great plan to me, as long as you maintain discipline as you mentioned.
However, it is my understanding that most lenders won’t allow you to use LOC money to purchase other real estate. If they find out, they will make the LOC callable and demand immediate repayment.

Reply

Brian Levredge February 2, 2014 at 9:43 am

I think they’re great (if used responsibly). I have one against my personal residence and one against some of my rentals, all of which are owned free and clear. This gives me a pretty sizable line in addition to my cash on hand. I am presently buying, rehabbing, and refinancing at LTV’s in the 60-70% range and am able to pay the line down in full every time. We then start the process over. Additionally, we flip homes using the line as well, but we don’t flip anything we wouldn’t mind owning as a rental (and we run the numbers that way as well).

The only caveat I would throw out there is that I’m a full time RE investor and contractor so I have a pretty good track record, which goes a long way with my lender. I also work with a smaller lender who has a lot more flexibility in making their own decisions, which is something larger lenders are not in a position to do.

Reply

Robert Steele February 2, 2014 at 7:51 pm

I look and look and looked and finally found a bank that would do a HELOC on an investment property – Wells Fargo of all places.

I used a free and clear rental as collatoral and started the underwriting process. I hear back 2 weeks later that they I dont qualify. Why? Because I have more than 4 houses. It doesnt matter if they have no mortgages on them or not. Stupid rules.

What I wanted to use it for was an “Australian style mortgage”. For instance, I draw $15K on the HELOC and pay down a mortgage in one lump sum. I then put the additional payments that I was going to put towards the mortgage to pay down the HELOC over a couple months. Because mortgage interest is calculated monthly while the HELOC is calculated daily I save on interest. This works when the rates are the same or less. In my case it was almost 2% less so that was an even bigger bonus.

Reply

Gene February 2, 2014 at 10:02 pm

In reference to to the using a HELOC to buy a rental for cash and then finance it with a new appraisal. I have been told every time that you must wait a year if you want to use a new appraisal for the loan to get a larger mortgage. Am I missing something?

Reply

Shaun February 3, 2014 at 11:49 am

This seems like a holy grail to get a bump up in available funds for investing.
Especially since they are easy and super cheap.
I have not had any luck getting them on any rental properties. Still working on it. (Tips for finding someone that will do it would be appreciated)
I do have one on our primary and it has been a fantastic tool to help buy property seamlessly for cash and to help fund rehabs.

Reply

Pete February 4, 2014 at 8:38 am

My question is why heloc over home eq, if you already know how you plan to spend the money? The cost is less typically and is usually fixed. Also a higher pct is usually allowed on rentals

Reply

Mehran February 5, 2014 at 2:37 am

HELOC comes with a lower monthly payment and isn’t amortized right away. The lower monthly payments make a big difference.

Reply

Trevor February 19, 2014 at 8:22 am

I tried to get a HELOC on a rental that is sitting free and clear. “PROBLEM!” To much outstanding ccard debt that went into getting and fixing the house. No one will finance me to consolidate. They are always giving me the, “income to debt ratio run around.” Property is currently rented. Anyone have any suggestions.

Reply

Pete February 20, 2014 at 7:59 am

R@trevor, you could look for banks that allow different ratios or calculate it different. Also reduce debt by snowballing one of the debts

Reply

Leave a Comment

Comment Policy:

• Use your real name and only your name in the field designated for your name.
• No keywords allowed as anchor text in the name or comment fields.
• No signature links allowed under your comments
• You may use links in the body of your comment, but it must be relevant to the discussion at hand, and not merely be some promotional link.
• We will have NO reservations about deleting your content if we feel you are posting merely to get a link without adding value to our discussion.
If you add value, but still post keywords, we'll use your comment, but remove your link and keywords.
• For more information about acceptable practice, see our site rules.

Want your photo to appear next to your comments? Set up your Gravatar today.

Previous post:

Next post: