HELOC LTV's and Interest rates. Is there a best balance?

Question

Hello all!I am very new to the site; just found it through the youtube channel. I am currently trying to do the homework related to the possibility of using a HELOC to finance my first investment in real estate: possibly as the down payment for multifamily of some type. However one thing I am wrestling with at the moment is whether or not LTV is more important than the accompanying interest rates or visa versa. Is there an optimal balance for such things? To possibly make such an assessment easier the hypothetical looks like the following:The residence in question is roughly $400,000 in value and a primary residence.Which would make more sense : 100% LTV offered with an APR at 8.74% (variable)  or                                                 80 - 85% LTV offered with an APR at 4.0% (variable) One of the harder things to decide is whether or not the ability to access that extra 20% in equity to potentially purchase a larger more lucrative property is offset by an interest rate that is most likely more than double at any given time. If this topic has already been discussed elsewhere in detail and I simply missed it, I would greatly appreciate it someone could point me to the relevant thread, but if not any and all input is greatly appreciated!!!Thank you!

Kyle J. · Answer

@Sean To I know you said it’s a hypothetical, but I think your numbers are a bit off and that’s going to skew the accuracy of any analysis or answers. For example, are you actually seeing a lender offering a HELOC at 100% LTV at an 8.74% interest rate? It’s pretty rare to find a lender willing to do 100% LTV, especially right now. Though I don’t doubt there are a few out there somewhere that will. It’s just not common. However, 8.74% interest on a HELOC secured by a primary residence is VERY high. If that’s really what they’re charging, you should shop around.

Anyway, since those are the numbers you gave us, I’ll give you my opinion based off those numbers. The way I’d choose is, I’d figure out how much money I actually needed. You say the house you’ll be using as collateral is worth $400k, so if I can do what I need to do with $320k-340k (80-85% of the home’s value), then I’m going to take the HELOC that has the lower LTV since the money I’ll be borrowing will be at a much cheaper interest rate.

On the other hand, if I can’t do what I need to do unless I have the full $400k, well then I guess I have no choice but to go for the HELOC with the 100% LTV, even if it means I’ll be paying a higher interest rate. That’s my way of looking at it at least. By the way, welcome to BP.

Melissa Uppelschoten · Answer

Hi Sean - Welcome to bigger pockets and to real estate investing. I used a HELOC to fund my first investment property 5 years ago. But I slowly dipped my toe in the water. All in for my project was $175k. It was in a neighborhood that was appreciating. We did a flip quality renovation but then rented it for 3 years then sold. That worked REALLY well for me.

The biggest concern I see with your situation is exactly what you mention - the uncertainty of the interest rates and you have a rather high price tag. I may be reading your post incorrectly - but this is in the multifamily forum, but you mention it is a primary residence. Ideal would be if it is Multifamily and you could live in one of the units - house hacking, which you may be familiar with. Anyway, you are smart for putting this out there and getting some insights before you jump. Wishing you all the best in your journey...Melissa

Sean T. · Answer

@Melissa Uppelschoten Thank you for the kind words and the advice as well. The residence I would be applying for the HELOC with is my primary residence, but the investment I'd be making with the funds allotted would be a multifamily of some type, like a 6 to 12 unit possibly? Being able to have that kind of cash on hand would make all the difference if trying to invest in something larger than a duplex or fourplex. And while I had seriously considered the house hacking route as my first foray into the world of real estate investment, the city I live in is extremely thin on such buildings! All of the fourplexes here for example date back more than a few decades and are in very undesirable areas in town for commute / quality of life.

Also, @Kyle J., thank you for the input. There is a credit union in my area offering just that combination (100% LTV @ 8.7% starting) but with your advice I am considering looking at perhaps a more budget friendly option to let me take advantage of those lower interest rates.