Home Equity Loan

12 Replies

Hello, I'm just getting started in real estate. I'm learning ways that I can hopefully buy or make a large down payment on my first rental property. A home equity loan or HELOC seem to be my best options right now. Although I've found many great resources on BP to explain how to obtain a home equity loan or HELOC, I have not been able to find information on the repayment process. Could any one explain this to me or post a link to a helpful BP post? Thanks.

HELOCs typically have a draw period and a repayment period.  During the draw, payments are sometimes interest only, sometimes based on the amount you've taken out.  Usually, at any point you can lock in the loan and convert to a fully amortized loan.  At the end of the draw period the balance will usually be automatically converted to a locked in rate and fully amortized.  Lot of hedging in there because terms vary quite a bit.

If you're going down this road, be very sure you can repay the HELOC even if your RE investments completely fail. Otherwise you run the risk a bad investment resulting in you losing your residence.

Jon Holdman, Flying Phoenix LLC

@Jon Holdman  some lenders also have "early pay off" penalties as well correct?

I've not seen a real pre-payment penalty on HELOCs, but they do sometimes make you repay some of the upfront costs if you take out a loan and then pay it off quickly.  Typically HELOCs don't have any up front costs like a refi does.  At least some of those costs are incurred by the lender.  They're just eaten by the lender on the assumption they make enough over the life of the loan to pay them off.  But if pay the loan off quickly, they will want repayment of some of those costs.

Again, very important to read the loan documents and understand what you're getting into.  These are much more varied than a conventional mortgage.

Jon Holdman, Flying Phoenix LLC

Originally posted by @Jon Holdman :

+1 to his advice. I used interest only 10 year draw HELOC with BOFA, it's like free money when you have 0.99% interest only for 10 years lol. Very handy to hand liquid cash on hand to execute deals then finance them.

Originally posted by @Bogdan Cirlig :
Originally posted by @Jon Holdman:

+1 to his advice. I used interest only 10 year draw HELOC with BOFA, it's like free money when you have 0.99% interest only for 10 years lol. Very handy to hand liquid cash on hand to execute deals then finance them.

This is a good point, however, most HELOCs are based off of prime rate. When the Fed decides to raise rates, prime will raise as well, thus jumping your HELOC percentage. In other words, most HELOCs are VARIABLE rates, until you lock them into place and amortize them. If you are still in your draw period, these rates can fluctuate without notice. It may not be a large enough jump to kill your business, but it may be enough to force you into a negative cashflow situation, thus risking your own personal residence. .99% is a dream rate (3.25%prime - 2.26%), but don't get your hopes up for this. BUT, congrats on such a low rate...use it while you can :)

There are many ways to repay a heloc. It can be amortized, or broken down, over a period of time that you like.  A good mortgage broker would be happy to help in this matter. One other thing I wanted to mention is to always have cash reserves on hand for unexpected expenses that can come up with you rental. Let's say the furnace goes out. How will you pay for it? If you use the heloc you may want to set aside a few thousand of for a repair or vacancy. I am speaking from personal experience. Be stuck with no emergency fund is no fun.

Thank you all for your answers. You have given me a lot to think about. 

Originally posted by @Matt Good :

@Jon Holdman  some lenders also have "early pay off" penalties as well correct?

 Yes. The banks and credit unions I have worked with (Key Bank, Navy Federal Credit Union, and Penfed) say that the closing costs will have to be paid if the line is closed within three years, but the line can be paid to zero without additional costs so long as it remains open during the first three years.

Originally posted by @Wilson Churchill:
but the line can be paid to zero without additional costs so long as it remains open during the first three years.

 I didn't know that! Good news!!

Is there a common or average loan repayment time frame? I've read 4 years and 10 years. Is that something that I would negotiate at the time of the loan?

I realized that banks may list these on their own websites. Please disregard the the question I just asked about average loan repayment time.

@Jeremiah Miller When you draw on the line of credit, your HELOC, once you exhaust it from buying assets........INCOME PRODUCING assets, not boats or toys..., you should or could refinance that heloc into permanent financing. You are in a game of moving equity into income producing assets.


Frank

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