HELOC for downpayment - means 100% financing - too expensive?

Question

Hi all,

Wrestling with making sense of HELOC as viable option for financing..

Current strategy would be to buy and hold cash flow + rentals. I have been planning to use HELOC to fund down payment, then mortgage to cover the rest - so in essence financing 100% of the property purchase.

Q1 -  Would the numbers ever work? Say on a $100k property renting for gross $1000 per month (1% rule) - 20% / $20k down payment using HELOC (Penfed Union at 1.5% payback on balance) - would be $300 per month plus a mortgage payment at say 3.75% (other $370 per month) puts cost of financing at $670 per month. No way right? Or am I missing something major? I assume I am as I see HELOCs as hot topic on BP so assume they are viable somehow.

Q2 - Is there a better way to use HELOC in property?

Any thoughts or guidance most appreciated.

Thanks much, Greg

Brian R. · Answer

I have purchased two of my current properties using a HELOC for the down payment, one was just in March of this year, and I am scheduled to close on another at the end of October this way.  Both of my HELOC's are 30 year interest only payments, but I figured out what principle would be, and am paying that as well.

Also, it may be a bank specific requirement, but I have to put 25% down if it is a two to four unit property.

Greg R. · Answer

@Jonathan Bombaci - thanks for your thoughts. Call with Penfed lead me to believe that monthly cost to me of HELOC would be 1.5% of the borrowed amount ie $20k x 1.5% = $300. Granted that number would go down every month as principle paid off. This is on 15 year loan. Seemed high to me too though.

Also know it would cost less if was an interest only HELOC but from what I read int only can lead to trouble - but I guess if using int only and then repaying HELOC by refinancing the property that would be a good way to keep monthly cost down initially until refinance time without risk of principle payment shock at end of term. Would / could that work?

Jonathan Bombaci · Answer

Yeah the HELOC is a valid way to fund a property. How are you getting the $20k HELOC costing $300 a month? Is that amortized over 30 years? That number doesn't seem quite right to me, I would expect it to be closer to $100 a month on a 30 year payback.

That being said if I was going to be leveraging 100% of the property value I would want that to be a better than normal deal. The 1% rule does not work in every market and every deal it's just a rule of thumb. I'm 95% leveraged on a 12 unit up in Northern NH and the numbers are pretty great. It's operating just north of what would be 2% of the property value in monthly rents. It would definitely still be a great deal if I was able to do 100% financing on it I just couldn't pull it off in the situation I was in. Does that make sense?

HELOC's can be a great way to get funding to buy another property it just depends on the deal and your risk tolerance.