Question around HELOCs

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Question around HELOCs

Joe McGovern
Member since 2019 · 11 posts · 6 votes

Hello!

I'm a newbie from Iowa to the real estate investment world and am in need of capital to make my first investment. One of the options I've been looking into is using a HELOC on my primary residence. Before doing this though, I want to make sure I fully understand it. I would like to borrow around 10-15k to assist with a down payment. My thought would be to make the minimum payment for ~6 months, and then repay the 10k in full. I could just wait 6 months for that additional 10k to be made available to me, but want to have the HELOC as an option in the event that I find an awesome deal before then.

Could someone tell me how to calculate the minimum payment on this? Does interest compound? Are there any annual fees, maintenance fees, or closing costs I should beware of in opening this account?

Does anyone have any experience using a HELOC to fund part of a down payment?

Thanks for the help!

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Darson GranthamBusiness Member
Realtor · Des Moines · Member since 2018 · 304 posts · 253 votes
6y

@Joe McGovern Great questions and I agree anyone who has equity in their primary and can make sure they dont spend the money on something non income generation should open a HELOC.

Most banks allow a HELOC to be int only payments . Int rate / 12 x amount pulled from the heloc, even if you open it and dont use any, it will sit there and you wont have to pay interest on it. Meaning the bank says you are approved for a $50k heloc and you dont need the money right away, you dont pay intreat on the $50k until you "pull it out".

Also most helocs will have a 5 yr term but then garantee additional years with a max increased rate. I like this because i can calculate that into the property I’m buying.

It cost me about $500 to open one, which by the sounds I should have shopped a bit more.

Good luck, and i’d love to hear the detail of the heloc that you get!

[email protected]515-612-6013
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  • Mike McCarthy
    Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    6y

    @Joe McGovern I think HELOCs are great. You’re only paying interest on what you’re currently borrowing and the setup costs are minimal.

    My HELOC cost $100 to close and took about 45 days (I wasn't in a huge rush for it). I can pay only the ~5% interest each month (variable) and pay it down whenever. Then the money is available when I need it for my next deal. After 10 years it'll convert into a fixed rate - but then I'll probably close it and start again.

    I got the HELOC with the same bank as my primary mortgage and they loaned a combined 89.9% of the value of the home.

    Almost no reason to not have one for a rainy day!!

    1Reply
  • Joe McGovern
    OP
    Member since 2019 · 11 posts · 6 votes
    6y

    @Mike McCarthy thanks for the quick response!

    For an example payment...

    If you had 10k borrowed and an interest rate of 5%, would you pay $500/mo? Or would you divide that number by 12, for a result of $41? Not sure which (or if either) is right but just wanting to figure out how that monthly payment is calculated.

    Thanks!

    1Reply
  • John Patterson
    round rock, TX · Member since 2015 · 16 posts · 16 votes
    6y

    My heloc has 50K out, and is 200 a month.  Interest only. 

    1Reply
  • Mike McCarthy
    Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    6y

    @Joe McGovern you divide the APR (5%) by 12. For a $10K loan at 5%, you'd pay $41/mo (0.417% per month).

    Not a bad deal!!

    But be sure to read the details of the HELOC before you close. Some do have annual fees. Some are interest only and some require partial principal repayment. And remember all are variable rate. Make sure you're getting one that makes sense for you.

    1Reply
  • Darson GranthamBusiness Member
    Realtor · Des Moines · Member since 2018 · 304 posts · 253 votes
    6y

    @Joe McGovern Great questions and I agree anyone who has equity in their primary and can make sure they dont spend the money on something non income generation should open a HELOC.

    Most banks allow a HELOC to be int only payments . Int rate / 12 x amount pulled from the heloc, even if you open it and dont use any, it will sit there and you wont have to pay interest on it. Meaning the bank says you are approved for a $50k heloc and you dont need the money right away, you dont pay intreat on the $50k until you "pull it out".

    Also most helocs will have a 5 yr term but then garantee additional years with a max increased rate. I like this because i can calculate that into the property I’m buying.

    It cost me about $500 to open one, which by the sounds I should have shopped a bit more.

    Good luck, and i’d love to hear the detail of the heloc that you get!

    [email protected]515-612-6013
    1Reply
  • Adam Edwards
    Financial Advisor · Saline, MI · Member since 2019 · 17 posts · 13 votes
    5y

    @Darson Grantham

    HELOCs (especially in 1st position) are powerful. I use mine as an operating account, with good cashflow the balance can be rapidly reduced and you are more liquid every month

    1Reply
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