HELOC on your primary residence?

Question

Ken Maddis · Answer

I'm also looking at a HELOC for the first property or two, however it looks to me like one would want to refi the property as quickly as possible into a 30 year fixed?

Being a shorter repayment schedule as well as higher interest, it looks like the HELOC would take a good bite out of one's cash flow, and that it is only a temporary solution, not a permanent one.

Josiah Kay · Answer

The process/product may vary by lender, but you would obviously need to go through the application process like any other mortgage and provide your income information. The lender will also order their standard documentation (title, credit report,  property evaluation or appraisal to determine the value of the property, etc.). Based on property evaluation or appraisal, they may allow for 80% - 85% LTV (based on the experience with a local lender). With 80% LTV, you could have a line for $30K (80% * $250K - $170K = $30K). The HELOC works like a credit card that is using your property as collateral (although the interest is not calculated like a credit card as it will accrue daily). You can draw on your HELOC when you need access to the cash and then you will start having to make payments on your HELOC.

Some HELOC's have a specific draw period and then a repayment period. During the draw period, you have access to draw funds from your HELOC when you want. Then, once the HELOC goes into the repayment period, you are restricted from making draws and you just need to make the payments on the remaining HELOC balance. I believe this is the more common one.

Other HELOC's don't have a repayment period and you will be able to draw on it until maturity, however, there will be a balloon payment due at maturity.

Lastly, it can vary by lender, but some may only require you to pay interest during the draw period and then it will switch to principal and interest for the repayment period. Other lenders may require a flat principal payment (say $100) plus interest.

If you have any other questions, I'd be happy to help!

Josiah