HELOC or Home Equity Loan a Good Idea?

16 Replies

Hello all!

At the point where we'd like to get a 4th property. I have about @150k equity in my first house, and was thinking about taking out a HELOC or Home Equity Loan to put down on a new place (if the numbers produce positive cash flow, of course). Still have to get that place appraised as well.

Any advice out there on if or how I should go about this?  In San Diego, so any new investments will be out of state probably, so there's that.  Been talking with @Memphis Invest about purchasing out there.

Thanks for any advice!

@Nathaniel Donnelly I think that is a great idea. HELOCs generally expire after 10 years, though you can renew. The nice thing about them is you don't pay interest when you are not using the money. I use a HELOC for flips. That way I know the money is going back in in a number of months. But it would be good for rentals, too, as long as you leave yourself enough liquidity for emergencies.

@Larry T. Thanks for the info! So I guess the next question is, "Where are the best places to apply for a HELOC?" Should I get an appraisal now, or will the "Lender" order one?

@Nathaniel Donnelly

Yes I agree HELOC's are the best deal for your situation, and also you can check with your local bank or the company that you currently have your mortgage loan with and they will more than likely offer you the HELOC since you already have built a strong relationship with them. The lender will be the one to order your appraisal as well so don't waste your money let them take care of it once you start the process with the lender.

Thanks

Derrick

Perfect!  Thanks, Derrick!  Have you worked with Memphis Invest at all?  If so, any words of wisdom?

Haha, just realized you may be their competition.  Let me watch your video when I get home.  Interesting.

@Nathaniel Donnelly

LOL!! No I have not worked with Memphis Invest, although I have heard great things about them, also Chris am I have exchanged emails on occasions here on BP. I am not sure if he and I are in competition b/c they are sooooo much bigger than I am and some of my turnkey properties are in areas they will not invest in. Which is fine because Memphis is a big enough city for everyone to invest in where they feel comfortable and feel they will achieve a profit in return.

Thanks for Checking out the video

Originally posted by @Nathaniel Donnelly :

@Larry T. Thanks for the info! So I guess the next question is, "Where are the best places to apply for a HELOC?" Should I get an appraisal now, or will the "Lender" order one?

The bank will have their own appraisal done, so no need to do your own.  Wells Fargo does HELOCs and they don't even charge for the appraisal. 

My bank told me the other day they were running a 12 month special.

They will lend for a Heloc at up to 80% of value. It's a local community bank with about 100 locations in multiple counties in GA. I do not have to pay for an appraisal. They send a drive by for an exterior BPO for a quick value and that is it.

The Heloc for 12 months is 1.75% so on 20,000 for instance I would pay 20 something bucks a month. If I went past 12 months they said it would go to 3% or around right at 40 a month. 

What is everyone else seeing for rate?? It's funny when you don't need the money people throw a lot of it at you! lol

Yeah, @Joel Owens , those terms sound right. I just got a HELOC (for use as temporary capital). The terms in this case was prime+0% (currently, 3.25%), 7 year draw.

My experience with my favorite lender has been the following: if there is ANY balance on the HELOC, they'll assume a monthly payment of 1% of the total line of credit amount counted towards your DTI.

So, if you're purchasing (or refi'ing) with favorable conventional mortgages, that can be a notable hit. $100k HELOC --> assumed $1k monthly expense without offsetting income. Just be aware if it may impact your situation.

Great info everyone!  I really appreciate the feedback.  I have a good idea of how I'm going to go about this now.  Thanks!

@Nathaniel Donnelly

Really good info about going to your local bank there in San Diego or even with a traditional lender like Wells Fargo. I have used Wells in the past in particular for HELOC loans, but have had more success lately with smaller, local banks and getting LOC's. As @Joel Owens  noted, you can get some great terms with smaller banks looking to build stronger and longer relationships and deposit accounts.

Thanks for the good words @Derrick Craig .  I keep hearing great things about you guys as well and have even given your number to a client of mine who made a major mistake buying Memphis properties from a company in Utah and needs help with management.  As you noted we work in different parts of the city and this one in particular is in an area that I do not manage.  Hopefully we can meet up soon and talk shop.

Best of luck Nathaniel and be sure to reach out if I can personally do anything for you.

Definitely shop around to find the best fit as the pay down rate and assumptions will greatly affect your calculated DTI. I found credit unions to be a good source with a variety of options. Most will lend up to 80% LTV, but I've seen options vary from 70% up to 95%.

As far as the pay down goes, as @Justin R. noted some banks might charge 1% of your remaining balance each month. This means you have a fairly high loan constant (with the amortization rate a little under 10-Yrs based on the initial payment). Granted you're paying it down quickly initially so your payment each month goes down. If you're trying to keep your payments low this probably isn't the way to go, especially if you're near the line for DTI.

Others might offer interest-only (with a balloon payment) -- offered at a higher interest rate, of course.

What I settled on is amortized over 20-yr at the PRIME rate with 80% LTV.

Good luck with your search! If you think of it after, reply back with what you settle on -- it's always good to see what other investors are finding (and learn how the story ends!).

The DTI on a 20,000 loan will not really affect me in my situation. My income is very, very high.

I guess it is all relative to what the amount is.

I am loving my local bank so far. They just sent me a business credit card if I want one. I don't really need it but they throw things at you when you have the money........... : )

0% Interest for the first 15 billing cycles. 9 percent fixed after that which isn't too bad.  

So does anyone have a recommendation for a small bank in San Diego?

Try Cabrillo Credit Union. I'm the chairman of the board and we do HELOC's.

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