HELOC

9 Replies

Hello Everyone, I am re-posting this question to change the subject from HELC to HELOC so it will hit user key words. Thank you. My wife and I are trying to buy a duplex in our town. We already have a nice SFH that we are renting out and we are now renting an apartment to live in. We have had the rental home for about 2 years and we are looking into a home equity line of credit to use as a down payment for the duplex and get FHA at 3.5% down. We will live in 1 side and rent out the other. Has anyone used this model for getting started? What obstacles or pitfalls may I encounter? Will this model work? Thanks to any input. Dennis

Hi Dennis,

With FHA loans, they do look at the source of your down payment. There is some flexibility, but they frown on the down payment being sourced from another loan. However, I would refer to your lender to be sure. You could borrow against a 401K, typically up to 50%, for a downpayment. Though, there are pitfalls to doing it that way also, as it may be hard to pay yourself back. But my thought is better to pay yourself interest than someone else.

http://www.fha.com/fha_article?id=441

@Dennis Standers . Some things to consider include the new mortgage insurance premiums (MIPs) that are in effect this year. For a 30 year loans at 3.5% down, you'll have to pay an annal MIP of 0.8% and upfront MIP of 1.75% of the loan. Often times the upfront MIP can be added into the loan amount. The annual rates have gone down half a percent since a couple years ago, but the down side is that you'll now have to pay the annual MIP for the entire duration that you have the loan. Even after you reach over 20% equity, the annual MIP would still exist. If I were to do the 3.5% FHA, I'd be looking to refinance once I hit 20% equity to get rid of the MIP...though who knows how much higher the interest rate will be several years from now.

I'm not sure what a duplex in Indiana is going for, but if you have the funds available in your HELOC, I'd analyze both cases where one you do the 3.5% down as well as a 20% down deal.

This is how I bought my triplex in 2009. I was fortunate enough to get a HELOC on my primary residence to use as the down payment of 25% (that's what was the minimum required for non-owner occupied). Then I just got a conventional loan for the other 75%. It's worked out great.

Of course 5 years later, my primary residence has appreciated quite a bit, so I just got a much bigger HELOC to use as a down payment on a second property.

@Dennis Standers this strategy can be challenging [living next door to your tenants] but some people have made it work - like @Brandon Turner .

The fixed APR and 30 year FHA loan is great, however.

As mentioned above, the source of the down payment can be a hold up if it's not seasoned or comes from another loan.  I assume the purchase price is well under $100k since your in Indiana?  If so, then $3500 shouldn't be too much of a challenge to come up with.

Another note that I learned from Mike Butler's "Landlording on Autopilot" is that you shouldn't tell your tenant that you are the owner [especially if living next door].  Instead, you are simply "The poor property manager".  I know there are ton of forums on this subject - but since you are in fact the PM, you are not telling the tenant something that is not true and there shouldn't be any ethical issues - IMHO.

Thank you! 

@Jeremy Pace

@Dennis Standers

My recommendation is to just be careful with HELOC as the rates are adjustable and rates will go up. It can get tricky down the road with 2 mortgage payments, on one property. It is a great idea to use this cash to invest as a down payment into another property.

Originally posted by @Andrew Robbins :

This is how I bought my triplex in 2009. I was fortunate enough to get a HELOC on my primary residence to use as the down payment of 25% (that's what was the minimum required for non-owner occupied). Then I just got a conventional loan for the other 75%. It's worked out great.

-

Did you use the HELOC funds immediately or did you have to season them for 2 months?

If season, what and how did you do it?

Were your HELOC and existing mortgage on your primary property from the same lender?

I presume the conventional loan on your rental would be a different lender than above primary property?

It would be cool to act the banker there tho, and use the banks own funds from the HELOC as DP on an investment property!!

It was 5 1/2 years ago, so my memory is a little hazy, but I think I was able to use the HELOC right away. My HELOC was with a different company than my first mortgage. Yes, conventional loan on the rental was with different company than HELOC. Hope that helps. Good luck!

Originally posted by @Andrew Robbins :

It was 5 1/2 years ago, so my memory is a little hazy, but I think I was able to use the HELOC right away. My HELOC was with a different company than my first mortgage. Yes, conventional loan on the rental was with different company than HELOC. Hope that helps. Good luck!

Thanks for the info, I appreciate the response.

All the best

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