HELOC on principal residence - great, but what happens if I move?

Buying & Selling Real Estate
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HELOC on principal residence - great, but what happens if I move?

Felipe A.
Gaithersburg, MD · Member since 2015 · 32 posts · 3 votes

I am exploring opening a HELOC on my principal residence allowing me to make a nice down payment on properties down the road.

However, if I move, I have to pay off the HELOC before satisfying the mortgage on the old house. If I used $50k on a HELOC on down payments on rental properties, I need to pay off that $50k off. What is the common approach to paying this off? I don't believe I can refi the rental properties notes to account for this $50k b/c I will exceed LTV ratios. Thoughts?

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John PowellPro Member
Real Estate Agent · Kennesaw, GA · Member since 2015 · 308 posts · 153 votes
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Do you mean sell when you say "move"? What happens if I move out and rent that property out and continue paying the Principal and the HELOC.
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  • John PowellPro Member
    Real Estate Agent · Kennesaw, GA · Member since 2015 · 308 posts · 153 votes
    11y
    Can you just keep paying the HELOC if you move? Or is there a clause that says they can call it if you move? Is this a common clause?
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  • Felipe A.
    OP
    Gaithersburg, MD · Member since 2015 · 32 posts · 3 votes
    11y

    John:

    That's my recollection from a conversation I had with a broker a year ago about securing a HELOC. She informed me that it had to be paid off before (or alongside) the principal mortgage. I guess I will research HELOCs to see if there are HELOCs that don't require payment in full upon a move.

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  • John PowellPro Member
    Real Estate Agent · Kennesaw, GA · Member since 2015 · 308 posts · 153 votes
    11y
    Do you mean sell when you say "move"? What happens if I move out and rent that property out and continue paying the Principal and the HELOC.
    1Reply
  • Joshua Springer
    Residential Real Estate Agent · Columbus, OH · Member since 2013 · 281 posts · 110 votes
    11y

    I'm trying to understand....are you going to sell your house when you move or keep it and rent it out.

    Typically a HELOC is a second lien on a property that has a payment at the same time as the first. If you move you'd still owe on both and if you sell they'd just be paid off like normal...assuming your sale price covers both of them combined.

    If you plan to rent out the property you'd have to look under what could be justification for a due on sale clause of an alienation clause.  

    I'm not guaranteeing this but like most due on sale clauses, the bank traditionally will use them if provoked for one reason or another...like missed payments.

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  • Janna M.
    Real Estate Investor · Tenafly, NJ · Member since 2015 · 20 posts · 6 votes
    11y

    You may be able to get a HELOC on your rental property depending on how much equity you will have.

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  • Felipe A.
    OP
    Gaithersburg, MD · Member since 2015 · 32 posts · 3 votes
    11y

    Sorry for the lack of clarity. My intent is to get a HELOC on my principal residence and use that cash to fund a down payment for a rental property.

    My moving scenario is if I move out of my principal residence by selling it.

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  • Gabe G.
    Greenwood, IN · Member since 2013 · 346 posts · 93 votes
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    If you sell your house, with a 2nd on it. The second must be paid off at closing.

    Since usually u can only go to 90 percent LTV now on principal, if your house doesn't drop in value, then the selling price of your house will pay off the second.

    If your house drops in value, you may need to bring money to closing.

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  • Felipe A.
    OP
    Gaithersburg, MD · Member since 2015 · 32 posts · 3 votes
    11y

    Gabe, precisely correct from what I understand. That brings me back to my prior question - I guess the only option is to pay off the HELOC. But, that defeats the purpose of using it to fund down payments on rental properties if I plan to move out of my principle residence in the neat term (within a few years).

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  • Joshua Springer
    Residential Real Estate Agent · Columbus, OH · Member since 2013 · 281 posts · 110 votes
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    If you can purchase some rental properties with your current untapped equity I don't see what your issue is with paying it off besides not being able to reuse it in the future.

    The alternative is waiting a few years till you sold your property, take the cash and invest in in downpayments.  If you think you can get a good deal I would expect you'd rather control the property for those extra years and get a nice write off as well during that time.

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  • Felipe A.
    OP
    Gaithersburg, MD · Member since 2015 · 32 posts · 3 votes
    11y

    Thanks for the reply, Joshua. In theory, I would be using my HELOC because I lack the funds to secure a down payment. So, if I use $20k of my HELOC as down payment on a rental property, that $20k is now tied up in my rental property. If I want to move out of my principle residence (for whatever reason) in 6-8 months, I have to pay off that $20k...but with what funds if they are tied up in the rental property?

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  • Richard C.
    Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
    11y

    That was explained above.

    You are only going to be able to borrow about 90% of the value of your house, mortgage and HELOC combined.

    Say it's a $100,000 house. You have a $70,000 mortgage. In theory, you can borrow $20,000 in a HELOC, and use it for your rental downpayment.

    When you sell, you get $100,000 (minus transaction costs.) You pay both the mortgage and the HELOC.

    What's hard?

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  • Felipe A.
    OP
    Gaithersburg, MD · Member since 2015 · 32 posts · 3 votes
    11y

    Understood, thanks all. I thought there might have been another option to pay off the 2nd/HELOC, but this makes the most sense. Appreciate the advice.

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
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    If I am understanding the scenario correctly...the HELOC would just be paid off with the funds from the proceeds of the sale....so you would get a smaller check at closing.

    Say your house sells for $200k....you owe $100k on your mortgage and $20k on your HELOC....you would merely get back $80k in the sale instead of $100k. (Simple math not including all the fees etc.)

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
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    Also....this is a great little home proceeds calculator for Montgomery County MD.

    http://www.a-1titlellc.com/calcMaryland.php

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  • Joshua Springer
    Residential Real Estate Agent · Columbus, OH · Member since 2013 · 281 posts · 110 votes
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    Ya I think you were just thinking you had to give the money back you owed from the rental...the reality is you are trading your equity in your home for equity in a rental. Ultimately you have to pay off your leveraged portion on your HELOC but you don't have to give away your rentals to do that :)

    Home worth $100,000

    Owe $50,000

    Equity $50,000(difference in what you owe vs what it's worth)

    If you sold house here for $100,000 you'd get a check for $50,000 (minus fee's)

    You get HELOC for $40,000

    Now:

    Home Still worth $100,000

    Owe $90,000

    Use $40,000 to buy two rental properties.

    If you sold house here you would only get a check for $10,000(minus fee's) but you'd still control your other rental properties.

    1Reply
  • Lynn McGeein
    Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
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    The reason we used a HELOC when we did it was that we were using the HELOC to purchase the rental with all cash, fixing it up, then getting a separate loan on that rental and paying off the HELOC when the rental loan funded, then do it again with the next one. Using it for downpayments would completely tie it up rather than as a line of credit to use for more temporary funding. If your scenario worked where you were using the HELOC temporarily and paying it back in between deals, then it would make sense to consider it even if you are moving in several years. Maybe consider using the HELOC to flip several properties until you build enough profit to pay off the HELOC and still have some nice down payment money for a buy and hold.

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  • Wesley Emison
    Rental Property Investor · Knoxville, TN · Member since 2015 · 16 posts · 4 votes
    10y

    I'd like to add one more wrinkle to this conversation. Without figures, this is my scenario. I have a 1st mortgage on my house and I also have a HELOC with an outstanding balance. I am currently under contract to purchase another house that I am going to move into as my primary residence. The timeline is that I am going to purchase my next primary residence on 10/31, move on 11/11 and then put my current home (the one with the HELOC) on the market to sell it hopefully by 11/21.

    I know I have to pay back the HELOC with the proceeds of the sale of my current home. My question is the timing. If I move into my next primary residence and no longer occupy mu current home (the one with the HELOC) for a period of time of 2 months or so while I have it on the market to sell, will the bank still allow me to use it during the time period that I am not living in it? If not, that's fine, I just don't want them to ask me to pay it back before my home sells because I am no loner living in it as my primary residence. Furthermore, I am going to need to tell the bank I have a HELOC with about the move before I sell my home with the HELOC on it because I need to change my mailing address when moving into our second primary residence.

    Thanks for clarifying my worry about the timing of selling my first home with a HELOC on it after I move out for hopefully only a few months.

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  • Bill Briscoe
    Accountant · Thornton, CO · Member since 2011 · 170 posts · 33 votes
    10y

    Wesley - no you don't have to pay back the HELOC if you move out. Owner occupancy only applies when you are taking out the loan. Although they may not let you draw any additional amounts once you move out.

    Further, you will need to qualify for a loan on your new house using debt/income and liquidity ratios that include your current debt.  Make sure your loan officer knows that you will be carrying debt on both properties at close - sometimes they assume a double closing of your sale and purchase at the same time.

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  • Joetta Toland
    Flipper/Rehabber · Loveland, CO · Member since 2018 · 2 posts · 0 votes
    8y

    Hi,

    So I did this a few years back; took 200K to buy another property. I have since split that new property and am selling one of the lots. I want to pay off the 200K heloc that I purchased it with but it was not officially a mortgage but I can show that I took all of these funds to purchase the property 10 years ago.  My question, is it going to be taxed as income or can I swing it as a mortgage payment, since it really was kinda one?

    Does anyone know?

    Joetta

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  • Joetta Toland
    Flipper/Rehabber · Loveland, CO · Member since 2018 · 2 posts · 0 votes
    8y

    ok, wait.. it does not have a bearing.. it is the basis.. opps!

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  • Cory K Bente
    Lender · Everett, WA · Member since 2019 · 55 posts · 25 votes
    7y

    @Felipe A. In this situation the primary lender for the the new house may request the heloc note. In WA, OO DOT has a 12 month OO clause. The primary mortg. u/w may refuse the downpayment funds since the clause is present.

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  • Maria Ivanova
    Member since 2022 · 1 post · 0 votes
    3y

    New to this chat but have similar questions:

    1. I own my condo free and clear. Able to get nice size HELOC. Want to buy a house using HELOC and move into it. Will rent my place I took HELOC under for a rental and start paying the HELOC.

    From what I am understanding is that I HAVE to stay in my primary residence (the condo) to use the HELOC.

    Is that correct? (And if I move my primary residence I'll have to pay off HELOC fully prior)

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