Should I use HELOC now?

Question

I’m under contract with an off-market deal which will close in 2 weeks. The price is $230K and it’s a cash purchase. After purchase rehab cost is about $15K.

I have enough cash in savings or I can use a HELOC to purchase it.

1. Use cash to purchase and then do a cash out refinance. Cash out refi rate is almost 8% now. But I’m a little worried that the bank can cancel the HELOC zig the market gets worse like I have read on BP.

2. Use the HELOC to purchase. The rate is prime rate +0.1. So today’s rate will be 7.85%. The payment will be interest only. After paying interest, property tax and insurance, there will be about $500 leftover from monthly rent. I can used the $500 to pay towards the principal. This way, I can save the cash in my savings for the next deal. Also in the future if the mortgage rate declines, I can refinance and payoff the HELOC.

Which option is more wise? Can the bank cancel my HELOC after I’ve used it?

Chris Davidson · Answer

@Lisa L. you can split the difference. I would make sure I have plenty of cash reserves. You can always pay the heloc off if you want to go back to cash, but once the cash is gone if they were to close the heloc you can't get the funds. The bank can call it but once it is gone and you are paying it is unlikely to be called.

I use my LOC to buy properties rehab with cash, and refi when need some more funds.

Best of luck!

LaShawnda Robinson · Answer

Lenders usually only cancel a HELOC for reasons related to fraud. When a HELOC is canceled, it’s terminated. You can look that information up in the Truth in Lending Act.

But I think you may be wondering can a lender freeze a HELOC? Yes they can. When a lender freezes a HELOC they put a temporary hold, blocking you from accessing additional funds from your credit line.

The reason a lender will freeze a HELOC are:

• Market conditions significantly reduce the home’s value.
• A shift in your financial situation raising questions about your ability to repay your credit line.
• A major change in your credit score and profile.

If your HELOC is frozen you can see how the lender can work with you to give you access to the credit line in the future. I hope this helps.