Downside of a HELOC? Your opinions?

Question

Hey all, I'm new here and looking at getting into real estate investing.  I'm curious if anyone can tell me the downside of a HELOC.  I was able to find a local bank that will give me a HELOC at 85% LTV on my primary residence for no fees at prime.

This seems like a really good way to get financing for my future real estate investing deals, can anyone tell me any downsides to using a HELOC (aside from the obvious interest payments)?

Does this make me any less desirable to other lenders?

Does it impact my credit negatively?

Ryan Swan · Answer

@Andy Bauman I used a HELOC on one of my rental properties to finance a large flip/reno project. I think I was paying about 4.5% when the project started, but the adjustable rate was around 6%(?) when the project was completed. Still probably saved me thousands of dollars of interest vs using hard money at 9-12% plus all the junk fees most HMLs charge. Why borrow from someone else when you can be your "own bank"?

The biggest risk longer term borrowing against HELOC is the adjustable rates, which I believe can adjust pretty quickly (every month). Even so, the top end rate may still be substantially less than current hard money rates during a high rate time period.

Cassandra Sifford · Answer

@Andy Bauman ... It took me two years to pull the trigger.  Overly cautious is my middle name LOL  I was so afraid to do it, but I said if not then when?  I told my friend about the HELoC and it's saved her a bunch of financial headache in paying off so many small bills and consolidated her debt.  I'm thankful that I did it as I would have never been able to save up enough money to fund a deal without it.  I'm glad I researched things, but if I had done it sooner, I would have a lower interest payment on my property mortgage.  Sometimes delaying a risk can cost you ... or save you depending on the situation.

Andy Bauman · Answer

Thanks for your opinions.  Seems to make a lot of sense to me, but I'm just overly cautious sometimes.

Cassandra Sifford · Answer

I purchased my 1st investment property with down payment funding and reno funds with a HELoC.  The only negative I can think of is not being motivated enough to make P&I payments if interest only is required.  Thats no negative on the product, just a negative long term vision of the borrower. I love the flexibility that it provides. Mine us a 10yr draw, option to fix the rate 3x and a 85% LRV. I plan to renovate my primary, increase the HELoC and purchase my next property.

Dave G. · Answer

LTV 85% at prime seems good to me. I've used a HELOC on my primary residence numerous times to support cash offers/acquisition without messing with more cumbersome financing or partners. I am a proponent of this and highly recommend it.

Matt Leber · Answer

@Andy Bauman it could negatively affect your Debt to Income (DTI) ratio of you are looking to use the HELOC to put down a down payment when getting bank financing. Lenders typically have a DTI threshold where they don’t lend if you exceed. If you’re buying cash, this is not an issue. Also not an issue when you have a zero balance on the LOC.

Most HELOCs I have seen have an adjustable rate. They’ll start you out at a low intro rate and it could increase over time. However, fixed rate options do exist if you would rather lock it in. We have a fixed rate HELOC at 4% - which is pretty great.

HELOCs are callable by the bank, meaning they can demand you pay the balance off at any time. This is unlikely but it could happen.

Jake S. · Answer

I do the same, I use a HELOC to make stronger offers (or I did, but I have since ventured into multi family syndication and raise money with my investors)Use a HELOC to make a strong cash offer, generally buy the property for below market value, build equity into it, and then refinance and repeat!