Investing: Line of Credit or Hard Money Loan

2 Replies

We're obtaining a line of credit against one of our homes to invest in our RE business. Both homes we own have no mortgage. Our home is worth $425K and our investment home is worth $245K. We will secure line of credit against our $425K home as we know we can get more to work with over the investment home. Our goal with this is to use for earnest money to purchase properties (get them under contract) but not to use for full mortgage on an investment home if we're flipping it but rather use hard money (1 - 3 % monthly) for the "mortgage".

My question is, would it be better to use our HELOC for the short term "mortgage" or the hard money? You hear about protecting your assets and personal liability/risk, so which is better? What do most investors do? I'd love to hear your thoughts on this. Thanks.

The rate that you'll pay for a HELOC will be significantly lower in almost every case versus using hard money. In addition you won't have another party dictating terms for you as to how you'll need to pay. In either case, using hard money or a HELOC you're still putting yourself at risk for a loss so make sure you run the numbers properly. You can increase the chance of profit using the HELOC because of the lower rates. I'd go with the HELOC.

Just met with our local bank. They advised the same, to use HELOC and not Hard Money since we have so much equity to work with. Their numbers are 80% on our home is approximately $340K. The first $250K is interest only payment at about 5% (annually) and any amount over that is at Prime only (3.25%) and interest plus principle payment. Term of HELOC is 20 years and we can only apply for more once per year. We do have to get an Appraisal ($700 for homes over 3,000 sq.ft) and for HELOC's over $250K.

On our investment property at $240K, we can only get 50%. So we are sticking with the HELOC on our residence for now and have the option later to use the investment property as our business grows.

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