could someone explain an equity line to me?

Question

I have read on it and i still don't think i grasp it. I read a story where someone had a 300k house that went up to 400k in value. they then pulled out the 100k extra and used it get another house. they mentioned that the 100k is like cash - how so? You have to pay it back, right? How would it work in this example?

300k house @ 3k a month PITI payment
increases by 100k to 400k.
you take out the 100k

then what? the monthly payment goes up, or what?

300k house @ 3k a month PITI payment
increases by 100k to 400k.
you take out the 100k

then what?  the monthly payment goes up, or what?

Account Closed · Answer

I just got a approved for a HELOC to start investing with. I sign on Friday.

It was tough to get high limit. I shopped around. It's funny how much the appraisals vary with different lenders.

My local credit union won this time. They did a 90% appraised value minus current mortgage.  I'm in California, so the appraised value dropped quit a bit. I could have got double 16 months ago.

Oh well, feels good to be moving forward.
This thread is helping me as well. 
Thanks everyone.

Juan Nunez · Answer

Should I pull money from my Heloc and deposit it into my checkings? I am about to close a deal this Monday, but I am worried about my HELOC being reduced by BoA. If they do I will be left without funds to fix this Property up.

Juan Nunez · Answer

I also heard that banks were cutting credit lines. I am thinking about pulling this money out while I still have a chance.

Mike V. · Answer

I've had two HELOCs.  The first was interest plus 1/2% principle per month, the second was interest only.  I just bought a house last week with my HELOC I will probably refinance but keep the money out in some other type of investment because more and more big banks are starting to freeze credit lines with no warning.  The best I have found in my area is 80% LTV and the appraisals are getting harder and harder.  I also found that getting a HELOC on an investment property is nearly impossible.

Will Barnard · Answer

40,000 loan X 5.24% (.0524) = annual interest only payment of $2096 / 12 months = $174.67 IO payment. (Heloc lines are interst only in most cases).

Juan Nunez · Answer

If I use a 40,000.00 Home equity line at 5.24% interest. What would be my monthly payment? I would like to factor this into my numbers. I have found online calculators but donot know if they give me the correct amount.

Will Barnard · Answer

Good job Matty. Credit unions are usually the best for HELOCs.
As Wheatie said, make sure the investment you purchase supports all the expenses including the new HELOC amount borrowed for acquisition. Also, Wheatie mentioned the term is not 30 years. That is correct, however it is not usually 10 years, rather 15. Either way, the interest only payments are the same regardless of the term. Just make sure you have an exit strategy at least one year prior to the term due on the HELOC or the ability to repay, refinance, etc.
Matty, keep in mind that the cost of your HELOC line (based on the prime rate) will be a tax deduction as well (for the interest). This reduces the cost of the borrowed money even more and adds value to your newly acquired investment property. :lol:

Kathy Potter · Answer

correction to my bad math in the last paragraph...One property at $700/month is 8.4% ROI. Three at $300/month ($900/month) is 10.8%.

Kathy Potter · Answer

When you decide to take equity from one property to by another, or several more, you have several options in "traditional financing". The HELOC we have discussed has the lowest fees and the least amount of paperwork, but usually is adjustable monthly and tied to some index, usually prime. So if you have a HELOC open for a while your costs could vary with rates going up and down.
You can do a "cash out refinance" instead, where you pull the equity from the property and have a new loan amount in all one loan. In the above example you would have one loan for $240,000, not a first mortgage and a HELOC.  Or you can do a fixed rate second mortgage for the equity. Both of these options allow you to be sure of what your costs will be every month. The costs to get these may be slightly higher so you need to consider that too.

There is never one rule for how you use your money to invest in real estate you just have to know your deals and be sure they all make sense financially. Although there is usually one rule for all, and that is LEVERAGE your money. Example, If you have $100,000 cash to invest. Say you put it all in to one property and it makes you $700/ month cash flow, That is 7% return on investment. Say you take the $100,000 and buy 3 properties and they each make you $300/month, so $900/month. That is a 9% return on investment. You have a higher ROI if you find the right deals. Now you have 3 properties someone else is paying for for you and  you have three properties, instead of one gaining value (Hopefully).

Jon Holdman · Answer

HELOC payments should be factored into the costs for the new property.  Simple as that.  If the new property is a good enough deal to support the payments on the HELOC, then proceed.