HELOC - what to say when the lender asks what the money is for?

74 Replies

I have a HELOC with Bank of America and they have zero control over how I use it. Moreover, I don't remember them asking how I planned to use it, either. Example: I bought a rental property with cash using HELOC funds, then quickly paid it back down to zero balance. I regard it as self-financing on smaller-sized real-estate deals. It also speeds up the purchase process -- I had the money in hand and closing took place in days, not weeks or months. And of course, a cash offer makes a huge difference to some sellers.

As for using HELOC funds for home improvement specifically on the residence the line of credit is drawn upon, it's supposedly tax-deductible.

HELOCs are fantastic, and the temptation to use them for other investments is very real. For instance, since the repayment interest rate on my account is currently 4.25%, if I elected to park $40K in an investment vehicle like BlockFi, which pays an 8.25% interest rate for storing certain types of cryptocurrency on its platform, you'd actually come out ahead and MAKE money. I haven't had the gumption to try it, though.  

If the bank asks how you plan to use the HELOC funds, you can always give them a list of several options: Student loan repayment, credit-card paydown, car-loan payoff, home improvement, or investing. That's being honest. You MIGHT use it for all or none of those. But if you tell them you are using the cash as a down payment to secure yet another property with a mortgage, they might nix the deal. Because with the HELOC in place, they are the lienholder on your house (and possibly the second lienholder if you still have a primary mortgage in place).

You might also find that the lender writing the mortgage on the new property won't process the loan if they know you are using borrowed funds as the source of your down payment. You'd be using borrowed HELOC money as the down payment to borrow MORE money on a second property, and they want you to have skin in the game, as well as something stashed away in cash reserves.

HELOCs are like a credit card -- at a fraction of the 18% the cards are charging. 

If your HELOC cap is high enough, you could buy a rental unit (not in Laguna, though) with cash and the bank wouldn't know the difference, or probably even care. Like Rodney Menendez said above, it's your equity money.

As others have said just tell them. My last closing I had my commercial banker wire it directly from HELOC with a response, "I wish more people actually used HELOC's in this way instead of buying a bigger boat." Both of my HELOC's I made it clear I was using it to buy more RE and neither said boo.

@Elizabeth Southall The "Catch" is that the interest rate adjusts. For investors, that's nothing new for a line of credit, and the rate is actually lower that a typical LOC, 3.84% currently. When you're paying off so quickly, it's less about interest rate and more about interest cost, and how much interest is paid over that condensed timeline. 
It's certainly not for everyone, but it is for everyone who qualifies. Really just the power of allowing all of your banking deposits to work for you, not a bank. 
The website is really built around getting to $0 as soon as possible, but my passion is using the 30 year access to equity to build wealth. 

@Syeed Shah the Heloc is such a mystery to me for some reason. What is the best way to go when saving it for a rainy day or investments when needed? Variable or fixed? How often can you use it? What is the recommendation in terms of draw period and such? And is it not super risky to put your primary on the line for investments? I'd be so grateful for anyone who could give me the play by play!

@Monica Ponton . They have 2 option. Revolving credit or lump sum. I took the lump sum option. The interest rate was somewhere around 5 percent. The turn around was quick. BOA was going to approve me for 25k only and I had more equity at my house.. i wad expecting 65k but spring eq approved me 95k. With the lump sum, I put it aside in my index fund. Vanguard total stock market. I am using some of the funds to buy a property and the rest will stay in index funds until another property comes around.

@Monica Ponton - It is very risky. I already bought investments through my savings. The other option is heloc. My properties will be aBle to pay off the equity in 5 years. I am just taking advantage of interest rate while properties become available that I feel is a good fit. Once a property becomes available. I would only recommend getting heloc if you are able to make monthly payments. If you own any investment properties, you can look at seeing if there is any banks or other company that will allow to get heloc on investment.

@Monica Ponton I actually went with fixed. When you have a revolving credit vs lump sum, you can take out the funds anytime you want. But interest will vary depending on the market and you have multiple loans multiple loans with revolving credit. For me, it was best to get lump sum. Inteesr rates are fixed for certain amount of time. Look into index funds vs single stock. It is much safer or you can put it in interest savings account.

any luck finding HELOC lender for rental properties. I could not find any after long search

Originally posted by @Elizabeth Southall :

@Justin Phillips thanks for the clarification! I'll crunch the #s and see if it makes sense for me. My strategy has been not to worry about paying off my mortgage, but to focus instead on building cash flow and net worth... so this is something different to think about.

Truth be told, I never want my balance to hit zero, because then all my idle deposits and balances are no longer working for me. I'm going to continue to recycle that equity to grow my portfolio. Plus with positive cashflow, my cashflow actually increases every single month, as my balance is brought down and my cost gets cheaper. 

Originally posted by @Elizabeth Southall :

Hi BP community! I'm in the process of applying for a HELOC on my primary residence, which is a condo. My plan is to use the money to purchase a multifamily property, move into one of the units and rent the other unit(s) out. My current primary residence will also become a rental.

I've called several lenders and am weighing out my options... they all ask: "What do you plan to use the money for?" What's the best response to that?

I'm concerned that if I share it's to buy more property, they may see that as a risky endeavor and charge me more for the loan or lower the LTV they'll offer. I can't say it's to pay off debt (I don't have any)... so I was thinking of saying it's for home improvement, but maybe they'll question why I'm asking for a $150k HELOC for home improvement on a condo?

Thanks in advance for your insights & expertise!

Like other have suggested above, it is best to tell the truth. Also, I would assume the least risky thing to do with a $150k HELOC is to invest in real estate. If you would have used it to buy a car or go on a spending spree then they should be worry. Anything other than real estate would carry a lot more risk so it wouldn't make any sense for them to increase the rate on a safe investment.

Khoa

You could state it is for future investment opportunities, if you are not 100% sure yet.

If the property is currently your primary residence and you plan to use the funds to buy a new primary residence, they will likely lower the max loan to value depending on the lender.