Home equity loan or Line of credit

17 Replies

I have a question about getting started buying my first investment property...right now I own my primary residence and it will be free and clear in approximately 2 1/2 years...I've been reading books on how you can use a home equity loan or a HELOC to secure a down payment for a investment rental property...I would like to know which one would you guys recommend doing for that purpose and if I should wait until my primary residence is free and clear before doing so? I haven't got a property picked out yet I'm still scouting neighborhoods looking for potential properties and practicing running the numbers on them, but I would like you guys input on that so when I do decide to buy my first rental I'll have an idea of which option to use as far as HEL or HELOC...

You don't need to wait. I would go HELOC route unless you already have big plans lined up for the money from a loan. The loan will look better credit-wise though because the HELOC will be seen as a revolving account and they don't like it when you max out revolving accounts as much. You could also do a cash out refinance which might give you the best interest rate but will probably cost more in fees. I would pick whatever option results in the highest amount of cash for you and the smallest payment with no balloon.

With the cash, you can buy foreclosures for example that may not qualify for any kind of traditional financing and it would likely give you the most amount of almost-instant equity.

@Arthur L. Timmins Jr.

Given the mortgages rates are very low around 4%, I would cash out refi. I just did this myself 2 months ago and I'm now using it as a down payment for a new property. You won't have any out of pocket costs. It's taken out of the cash you're already getting at closing. Good luck!

thanks for the info @Jassem A. And @Michael Barbari, I'm gonna look into that and I'm still pretty new to all of this and I haven't even ever heard of a cash out refinance so thanks for letting me know about that option as well...how would I go about doing the cash out refinance?

There might not be out of pocket costs for a cash out refinance because it comes out of the cash you would otherwise get.  Interest rates can be pretty low as well for equity lines or loans depending on your credit with fees in the hundreds rather than multiple thousands.  They also tend to close quicker (might take a week or less and the cash out mortgage could take a month or more).

Talk to several local credit unions along with local and national mortgage lenders and banks and see who will give you the lowest interest rate and payment and the most cash.

@Arthur L. Timmins Jr.

Always remember that heloc rates follow prime and is not fixed which is currently at 3.25. 10 years ago when I started banking it was 8.25. Feds are already talking about raising rates and that will directly reflect mortgage and heloc rates. Lock in when you can. You will have 4% money for the next 30 years. By the way, helocs have been taking 4-6 weeks for the last 10 years and 3 different banks I have been with.

thanks for all the advice guys, it's very much appreciated and I learned something new in the process...now I'll just have to put it into action!

The difference I've noticed is that when I do a cash out refinance, the closing happens at a title company but when I do an equity loan or line of credit, the closing either happens online or at the bank or credit union extending me the credit.  So I guess the delay for the cash out mortgage is because I am at the mercy of the title company and how quickly they are able to perform a title search.

@Arthur L. Timmins Jr.

Who is your present home loan through? Whoever that is will probably be easiest to work with for the HELOC (typically) rather than another bank.

I might differ from the others, however I'd think a HELOC would be the way to go - little fees, and this allows you to use your house as an ATM if you need to act quickly (use cash) to purchase a property, then later if you are holding the property you can go back and get more permanent financing.

If you do a cash out refi on your house, you've probably just increased your house payment again and are locking yourself into mortgage payments again for however long your new mortgage is, plus all of the fees/taxes (mortgage registration tax, loan recording fees, fee for this, fee for that etc)

Maybe I'm a bit more conservative - but probably would make your life a bit easier if you have your house paid off and you are able to throw more of your cash into your RE business later on.  Just another angle to think of.

There are also ways and banks you could go through where you'd probably have little money out of your pocket using a combo of your HELOC (for the down payment) and traditional financing to finance the purchase/reconstruction costs of a new property.

Relianz (now Union State Bank) (Brian Berkley is who I dealt with) would be a local bank that would do that sort of thing.  Maybe Rose Hill bank, CU of America might be someone to check into.

Your Intrust, Fidelity, Commerce, BofA etc are all probably going to be a pain to deal with as far as paperwork and fees and they are also a bit more conservative.  A small bank like Relianz (union state bank) , Equity Bank, Rose Hill Bank should be a little more reactive and able to move a bit quicker if you find a good deal and they aren't needing to underwrite a loan to Fannie/Freddie guidelines.

Hope this helps.

The problem with cashing out is you can't use it like a credit line or line of credit.  Once your cashed out that's it.  Unless you want to pay that down and refi again.  Helocs are very inexpensive to close on.  You get the right kind of Heloc its like a huge credit card. Second mortgages which are more expensive than Helocs are the same way as a mortgage.  You have to pay them down and can't use them again.   

With a Heloc you can buy a deal or make a DP flip the deal pay the Heloc back down and use it again.  It's a ready line of credit in that case.  At very low rates.  So in essence a Heloc isn't the same as a mortgage.  Once again its a line of credit based on the equity in your house.  Don't ever close it out and you can use it over and over.  You may even be issued checks on your equity line.  Which means its ready funds for the courthouse steps. Rinse and repeat.  Shop for the best rates and terms.  You want to be able to use it again with little restriction.  Banks or Credit unions are the best places to shop for them.  In addition the appraisals on them are cheaper and are short appraisals.  The process is usually fairly quick. 

Wells Fargo has a good program we used. Less than 4% on a HELOC with a cash advance, fixed for 3 years.

@Arthur L. Timmins Jr. , I want to second what @George Allen said about the difference between the vehicles being discussed in this thread.

A cash-out refinance is basically you taking a mortgage out on the house, and removing up to 80% of the equity you have in your home, in the form of a big check to you at closing.

A HELOC is a line of credit, similar to a credit card. You have the ability to take out up to $XX, but you can take out less if you would like. Let's say you have a $100,000 line of credit. This means you can borrow up to $100,000, but you don't have to. Maybe you only need $20,000. So you take out the $20K, and you still have up to $80k available to take out. Once you pay the $20k back, you can borrow it again and again until you close the HELOC completely.

When you cash-out refi, you have to take out the money in one lump sum. Once you pay it back, it is no longer available to you, unless you refi again, or take out a HELOC.

If you plan to be in the property long-term, a HELOC might be the best bet.

Originally posted by @Mindy Jensen :

@Arthur L. Timmins Jr. , I want to second what @George Allen said about the difference between the vehicles being discussed in this thread.

A cash-out refinance is basically you taking a mortgage out on the house, and removing up to 80% of the equity you have in your home, in the form of a big check to you at closing.

A HELOC is a line of credit, similar to a credit card. You have the ability to take out up to $XX, but you can take out less if you would like. Let's say you have a $100,000 line of credit. This means you can borrow up to $100,000, but you don't have to. Maybe you only need $20,000. So you take out the $20K, and you still have up to $80k available to take out. Once you pay the $20k back, you can borrow it again and again until you close the HELOC completely.

When you cash-out refi, you have to take out the money in one lump sum. Once you pay it back, it is no longer available to you, unless you refi again, or take out a HELOC.

If you plan to be in the property long-term, a HELOC might be the best bet.

 Very true Mindy and equity lines are very popular with many investors. Another thing is house hacking (i don't like that word hacking lol).  Do a nice rehab as primary then get an equity line.  You can't use credit cards for a DP.  You can't borrow money from a bank for a DP.  However if I am correct you can use an equity line for a DP.  You always have to source money of course for traditional loans.  With an equity line its a breeze.  Of course once again there is the courthouse steps and that comes in really handy.  Mindy is right its great for people doing rentals also.

Originally posted by @Shane H. :

@Arthur L. Timmins Jr.

Who is your present home loan through? Whoever that is will probably be easiest to work with for the HELOC (typically) rather than another bank.

I might differ from the others, however I'd think a HELOC would be the way to go - little fees, and this allows you to use your house as an ATM if you need to act quickly (use cash) to purchase a property, then later if you are holding the property you can go back and get more permanent financing.

If you do a cash out refi on your house, you've probably just increased your house payment again and are locking yourself into mortgage payments again for however long your new mortgage is, plus all of the fees/taxes (mortgage registration tax, loan recording fees, fee for this, fee for that etc)

Maybe I'm a bit more conservative - but probably would make your life a bit easier if you have your house paid off and you are able to throw more of your cash into your RE business later on.  Just another angle to think of.

There are also ways and banks you could go through where you'd probably have little money out of your pocket using a combo of your HELOC (for the down payment) and traditional financing to finance the purchase/reconstruction costs of a new property.

Relianz (now Union State Bank) (Brian Berkley is who I dealt with) would be a local bank that would do that sort of thing.  Maybe Rose Hill bank, CU of America might be someone to check into.

Your Intrust, Fidelity, Commerce, BofA etc are all probably going to be a pain to deal with as far as paperwork and fees and they are also a bit more conservative.  A small bank like Relianz (union state bank) , Equity Bank, Rose Hill Bank should be a little more reactive and able to move a bit quicker if you find a good deal and they aren't needing to underwrite a loan to Fannie/Freddie guidelines.

Thanks for the info @Shane H. Very helpful...My current Mortgage is through US BANK and I may try with them first since my loan is through them, but I'm also going to look into the local smaller banks that you mentioned in your post as well...I currently bank with meritrust CU formerly Boeing credit union I may shop around with them also

@George Allen and @Mindy Jensen thanks for breaking it all down that way and giving your input...after reading your post I'm definitely thinking of going with the HELOC route...once again thanks for the information, greatly appreciated

No problem @Arthur L. Timmins Jr. I havent completed a lot of deals as I've focused on building equity in what I have, however have completed many more hours in due diligence than i care to count....HA Plan on reworking the financing I have in place myself and establishing a LOC so I can increase my purchasing power.

I'd think US Bank would definitely be who I'd check first on the HELOC since they hold your mortgage -- you'll probably receive the most favorable terms from them and would probably be easiest to set up -- they do not have any branches in Wichita, however should be something you can do online/over the phone. I think others have done a good job of explaining how it works -- basically like a credit card of sorts, or cash advance line.

One thing to keep in mind on the smaller banks per my research is they will typically move faster on a loan, however it can be a bit more difficult to get long term interest rates locked in.  Have to be sure to ask what their terms will be -- ie 5 year fixed, then adjustable - 20 year amortization period, 5 year fixed, then balloon payment or refi would be required etc.

A person I met yesterday advised me of a bank I plan on talking to myself - Stockman bank or Stockyard bank -- something of that nature in Arkansas City -- may be worth a call -- he had received favorable terms on investment property and found they were easy to deal with and they kept his loans in house.

One strategy I plan on using as I look to take on more acquisitions is what was discussed in this Bigger Pockets PODCAST -- Will re-listen to it again, however Jared described having a business plan, and putting together a packet for the lender...I believe his experience would prove to be right that most people dont do this and the bank will take you more seriously if you provide them with this info.

great post. Will post the deal i will be making and the terms of the bank. Great post made my bedtime a little less stressful 

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