HELOC - Most Important Things To Consider?
Member since 2019 · 45 posts · 47 votes
Hi all,
I'm just starting to research getting a HELOC on my primary residence to use for capital for BRRRR projects. What are some things you wish you knew before using a HELOC for BRRRR? What are the most important things to consider? What often gets overlooked that hurts new investors?
@Christopher Mooney sometimes people ask about HELOCs to understand the differences between them and other loan products, like a standard "cash out" loan. To me there's a couple of main points of difference between the two:
1. Lines of Credit have low costs but the rate adjusts
2. Mortgages are fixed Rates but have higher costs
What this means is that a Line of Credit (or HELOC) is NOT designed to be a permanent financing solution. Two of the common areas of concern for HELOCs I see out there is the 10 year maturity date and the adjustable rate. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. What will rates be in 5 years? Who knows? That's called risk. Unknown = risk. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC, 10 years later it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when it matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.
What HELOCs are designed for is to be a giant credit card. And just like any credit card, you need a plan to pay it back. So, if you use it to say....buy another property. Then flip that property...thus paying back your Line of Credit. Then that's perfect! Because you will never get surprised by an adjusting rate or keeping a balance on it. HELOCs are PERFECT for people who have a plan to pay it back.
On the other hand, if you were going to use that Line of Credit for the downpayment on a property that you were looking to buy and hold for 30 years....this would be very counterproductive. The 30 year fixed rate loan would be a better fit for this purpose.
You might be able to think of some other scenarios but hopefully this concept is good enough to know the difference between the two. Thanks!
They are adjustable rate.
Typically need to be in second lien position (there are exceptions).
They are like a credit card (pay it off and use it again as many times as you like during the draw period).
There may be a required initial draw amount you may not be allowed to payoff for a certain period of time.
Blended rate with a first mortgage and a HELOC in second may be higher rate than just cash-out refinancing. So, don't be bound to the rate of the first mortgage!
@Ryan Muska thanks for the input! Definitely learned a couple new things here
The HELOC will offer you greater flexibility compared to a cash- out refi.
If you go the route of a cash out refi you will most likely be giving up on a nice low fixed rate that you have today. You'll also begin to start making a new payment based on the higher loan amount from the lump sum you've pulled out. What if it takes you a while to find a project to invest in? You could potentially be making payments on that cash which you aren't even using...
A HELOC usually comes with a 10-year draw period that you can use when needed. If it takes you 6 months to find a project, then you'll have credit available to access when needed and you wouldn't have been making payments all those months when you didn't need that cash. You'll also have a set amount to draw from when needed and when you pay towards the balance and bring that balance down, you free up available credit to use again when needed. The versatility a HELOC offers is nice and a good tool to have in your arsenal.
Most HELOC's have an early pre-payment penalty for the first 3 years. The penalty applies if you payoff and close the line. If you pay to zero and keep it open, you wouldn't see a penalty. Also, keeping it in place even if you aren't using it could still be a convenient thing to have especially if you are always looking for potential deals to move on.
Rates are always adjustable and the minimum payment a lender wants is interest only. It's on you to pay extra towards the balance during the draw period. The interest only piece is generally very attractive to investors as well who are focused on monthly cash flow.
One potential downfall could be with DTI. Let's say you have a 100k limit but a zero balance on an existing HELOC. If you are applying for a mortgage for some other future property, a lender may assign a qualifying payment to that HELOC even if you currently do not have a payment, similar to home underwriters handle student loans in deferment. If your ratios are tight, that might be a challenge.
Good luck in your quest for some new BRRRR projects!
Jason
@Christopher Mooney sometimes people ask about HELOCs to understand the differences between them and other loan products, like a standard "cash out" loan. To me there's a couple of main points of difference between the two:
1. Lines of Credit have low costs but the rate adjusts
2. Mortgages are fixed Rates but have higher costs
What this means is that a Line of Credit (or HELOC) is NOT designed to be a permanent financing solution. Two of the common areas of concern for HELOCs I see out there is the 10 year maturity date and the adjustable rate. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. What will rates be in 5 years? Who knows? That's called risk. Unknown = risk. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC, 10 years later it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when it matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.
What HELOCs are designed for is to be a giant credit card. And just like any credit card, you need a plan to pay it back. So, if you use it to say....buy another property. Then flip that property...thus paying back your Line of Credit. Then that's perfect! Because you will never get surprised by an adjusting rate or keeping a balance on it. HELOCs are PERFECT for people who have a plan to pay it back.
On the other hand, if you were going to use that Line of Credit for the downpayment on a property that you were looking to buy and hold for 30 years....this would be very counterproductive. The 30 year fixed rate loan would be a better fit for this purpose.
You might be able to think of some other scenarios but hopefully this concept is good enough to know the difference between the two. Thanks!
@Christopher Mooney- HELOCS are relatively generic from one lender to another ...check terms ...margin...indexes ..maximum ltv and cltv allowed ...interest only payment terms ...overall terms ....prepayment options . costs / fees .....often the best heloc you can obtain is from your own bank or from a small credit union or bank where you live .....you should be able to get one for under $500
Thanks everyone for the replies! I spoke with my bank who I have my primary mortgage with (Navy Federal), and they echoed most if not all of what everyone said here. They did say there's no prepayment penalty which is nice, but that's just in terms of paying back anything borrowed. I didnt ask about if I closed it prior to ten years, I dont plan to, unless I run into a DTI issue as you mentioned @Jason Potrzeba
@Jason PotrzebaThe only thing I didnt understand when I talked to a mortgage loan officer is how an IO line could have a lower monthly cost than a P&I line. If I'm using $50K of a $100K HELOC, and the APR on the P&I line is 8.75% but the APR is 9.75% on the IO line, I'm still borrowing $50K and pay interest on that...how can the IO payment be less?@Jason Potrzeba
HELOC is one the dumbest things to consider. Quit leveraging to leverage.
If you don't have the means to speculate, don't play ball. I don't care if the investment is intrinsic day 1, it's still straight speculation. Only people to really fight this notion are guess who? Lenders. No **** sherlock, they got a product to push.
HELOC is one the dumbest things to consider. Quit leveraging to leverage.
If you don't have the means to speculate, don't play ball. I don't care if the investment is intrinsic day 1, it's still straight speculation. Only people to really fight this notion are guess who? Lenders. No **** sherlock, they got a product to push.
soooo...I should Dave Ramsey it and pay cash for all my rental properties? Not sure what your constructive suggestion is here. Elaborate for the audience
HELOC is one the dumbest things to consider. Quit leveraging to leverage.
If you don't have the means to speculate, don't play ball. I don't care if the investment is intrinsic day 1, it's still straight speculation. Only people to really fight this notion are guess who? Lenders. No **** sherlock, they got a product to push.
soooo...I should Dave Ramsey it and pay cash for all my rental properties? Not sure what your constructive suggestion is here. Elaborate for the audience
Where did I say that? Just cause I said a HELOC is dumb doesn't mean I said go all cash, 0 leverage. I doubt your reading comprehension is poor, I bet your sensitivity is high and this got you triggered. Your impulsiveness makes sense on why you think this is a sound idea.
I said quit leveraging to leverage. You're taking leveraged funds(HELOC) to leverage(a house payment). Right?
Instead, go work and earn the 25% down & capable of amount of reserves. And go buy a house that fits this criteria. That's my constructive suggestion. My destructive suggestion is to never start a title with HELOC-the most important things to consider and get mad when someone says quit leveraging to leverage.
There is nothing "evil" or "dumb" about variable rate loans. HELOC is just another tool in the toolbox, it can used in dumb ways but it is a silly thing to say that HELOCs are dumb. Having an open line of credit like that can be very useful for smoothing over short term cash flow constraints.
There is nothing inherently more risky in the use of a HELOC than any other variable rate credit line. Be thoughtful and intelligent in how you put it to use.
One way things like a HELOC can be very smart is when it allows you to avoid the forced sale of an asset at an inopportune time.
There is nothing "evil" or "dumb" about variable rate loans. HELOC is just another tool in the toolbox, it can used in dumb ways but it is a silly thing to say that HELOCs are dumb. Having an open line of credit like that can be very useful for smoothing over short term cash flow constraints.
There is nothing inherently more risky in the use of a HELOC than any other variable rate credit line. Be thoughtful and intelligent in how you put it to use.
One way things like a HELOC can be very smart is when it allows you to avoid the forced sale of an asset at an inopportune time.
They are adjustable rate.
Typically need to be in second lien position (there are exceptions).
They are like a credit card (pay it off and use it again as many times as you like during the draw period).
There may be a required initial draw amount you may not be allowed to payoff for a certain period of time.
Blended rate with a first mortgage and a HELOC in second may be higher rate than just cash-out refinancing. So, don't be bound to the rate of the first mortgage!
You said, "They are like a credit card (pay it off and use it again as many times as you like during the draw period). What do you mean by paying the heloc off during the draw period? Do you mean progressively pay off the heloc so it stays perpetually open for use?
@Christopher Mooney sometimes people ask about HELOCs to understand the differences between them and other loan products, like a standard "cash out" loan. To me there's a couple of main points of difference between the two:
1. Lines of Credit have low costs but the rate adjusts
2. Mortgages are fixed Rates but have higher costs
What this means is that a Line of Credit (or HELOC) is NOT designed to be a permanent financing solution. Two of the common areas of concern for HELOCs I see out there is the 10 year maturity date and the adjustable rate. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. What will rates be in 5 years? Who knows? That's called risk. Unknown = risk. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC, 10 years later it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when it matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.
What HELOCs are designed for is to be a giant credit card. And just like any credit card, you need a plan to pay it back. So, if you use it to say....buy another property. Then flip that property...thus paying back your Line of Credit. Then that's perfect! Because you will never get surprised by an adjusting rate or keeping a balance on it. HELOCs are PERFECT for people who have a plan to pay it back.
On the other hand, if you were going to use that Line of Credit for the downpayment on a property that you were looking to buy and hold for 30 years....this would be very counterproductive. The 30 year fixed rate loan would be a better fit for this purpose.
You might be able to think of some other scenarios but hopefully this concept is good enough to know the difference between the two. Thanks!
I had considered a Heloc for purchasing land to secure a construction loan, however, that heloc couldnt be paid back till after build completion likely a year later when I refi out of the construction loan or sell the cabin, in which case would I make much on the sale on the back end when I have to use that money to pay off the heloc? Likely no. So really they are good for like you said, fix flips but buy n holds are tough... maybe refi's after construction with all that created equity. But those are tough numbers to project. And its all about estimating accurate numbers.
You said, "They are like a credit card (pay it off and use it again as many times as you like during the draw period). What do you mean by paying the heloc off during the draw period? Do you mean progressively pay off the heloc so it stays perpetually open for use?
A HELOC is a line of credit. You use it and pay on it regularly. To get money you make a draw from the loan. The line of credit is available for the life of the HELOC. One of it's great advantages is that you get it set up and can hold it as a reserve. For example, if you lose your W2 job you won't be able to get a HELOC, but if you already have one in place you can use it to help bridge between jobs .
You get the HELOC BEFORE you need it so that it is in place to use when you need to smooth out a cash flow hiccup.
HELOC is one the dumbest things to consider. Quit leveraging to leverage.
If you don't have the means to speculate, don't play ball. I don't care if the investment is intrinsic day 1, it's still straight speculation. Only people to really fight this notion are guess who? Lenders. No **** sherlock, they got a product to push.
soooo...I should Dave Ramsey it and pay cash for all my rental properties? Not sure what your constructive suggestion is here. Elaborate for the audience
Where did I say that? Just cause I said a HELOC is dumb doesn't mean I said go all cash, 0 leverage. I doubt your reading comprehension is poor, I bet your sensitivity is high and this got you triggered. Your impulsiveness makes sense on why you think this is a sound idea.
I said quit leveraging to leverage. You're taking leveraged funds(HELOC) to leverage(a house payment). Right?
Instead, go work and earn the 25% down & capable of amount of reserves. And go buy a house that fits this criteria. That's my constructive suggestion. My destructive suggestion is to never start a title with HELOC-the most important things to consider and get mad when someone says quit leveraging to leverage.
Clearly you're the overly sensitive one here when you're ranting and raving about how bad HELOCs are and making poor judgements and assumptions. If it makes you so emotional, best to just avoid the topic and this post
Hi all,
I'm just starting to research getting a HELOC on my primary residence to use for capital for BRRRR projects. What are some things you wish you knew before using a HELOC for BRRRR? What are the most important things to consider? What often gets overlooked that hurts new investors?
HELOC is based on Prime-rate hence it's disadvantage to use. DSCR loan was like 11%, HELOC was like 9-10% , not that much different.
In general refi is better than HELOC but who wants to do HELOC is our main mortgage is 3%, correct.
Having said, comparing HELOC vs DSCR loan, DSCR seems "slightly" better than HELOC as it's not tied to primary's.
HELOC is one the dumbest things to consider. Quit leveraging to leverage.
If you don't have the means to speculate, don't play ball. I don't care if the investment is intrinsic day 1, it's still straight speculation. Only people to really fight this notion are guess who? Lenders. No **** sherlock, they got a product to push.
soooo...I should Dave Ramsey it and pay cash for all my rental properties? Not sure what your constructive suggestion is here. Elaborate for the audience
Where did I say that? Just cause I said a HELOC is dumb doesn't mean I said go all cash, 0 leverage. I doubt your reading comprehension is poor, I bet your sensitivity is high and this got you triggered. Your impulsiveness makes sense on why you think this is a sound idea.
I said quit leveraging to leverage. You're taking leveraged funds(HELOC) to leverage(a house payment). Right?
Instead, go work and earn the 25% down & capable of amount of reserves. And go buy a house that fits this criteria. That's my constructive suggestion. My destructive suggestion is to never start a title with HELOC-the most important things to consider and get mad when someone says quit leveraging to leverage.
Clearly you're the overly sensitive one here when you're ranting and raving about how bad HELOCs are and making poor judgements and assumptions. If it makes you so emotional, best to just avoid the topic and this post
Clearly you're the overly sensitive one here when you're ranting and raving about how bad HELOCs are and making poor judgements and assumptions. If it makes you so emotional, best to just avoid the topic and this post
Your point is actually similar to Andrew's point from Guaranteed Rate. I agree leverage over leverage is dangerous especially if it's tied to primary.
Rather than using HELOC as downpayment for a BRRRR project, better to use loan from 401k and/or Portfolio LOC. Each can give 50k if you have sizeable portfolio more than 50k and the rate is less than HELOC (5.5 for 401k and 5.75-7.0 for PLOC). There's one bank before also that can give Personal LOC up to 100k, but no longer offered LOL
but my biggest complaint of HELOC is becoz it's using prime so the rate is so bad I'd rather go straight DSCR loan.
Clearly you're the overly sensitive one here when you're ranting and raving about how bad HELOCs are and making poor judgements and assumptions. If it makes you so emotional, best to just avoid the topic and this post
Your point is actually similar to Andrew's point from Guaranteed Rate. I agree leverage over leverage is dangerous especially if it's tied to primary.
Rather than using HELOC as downpayment for a BRRRR project, better to use loan from 401k and/or Portfolio LOC. Each can give 50k if you have sizeable portfolio more than 50k and the rate is less than HELOC (5.5 for 401k and 5.75-7.0 for PLOC). There's one bank before also that can give Personal LOC up to 100k, but no longer offered LOL
but my biggest complaint of HELOC is becoz it's using prime so the rate is so bad I'd rather go straight DSCR loan.
I understand HELOC is gaining popularity these days because everyone primary is below 4% so cash-out refi is out of consideration.
There's one CU out there though that could give 100% CLTV from primary's. I probably have no issue tapping into HELOC if my househacking in primary is giving me DSCR 1.0 so my tenant in primary would pay the HELOC too LOL LOL
Been thinking about it for a while.
i was going to ask, are you going to use the HELOC for the entire project? for the down payment? have you done a BRRRR before?
FWIW i think @V.G Jason is actually just trying to look out for you.
i was going to ask, are you going to use the HELOC for the entire project? for the down payment? have you done a BRRRR before?
FWIW i think @V.G Jason is actually just trying to look out for you.
Not just him, but everyone on this board that pushes this nonsense. In the low rate era, sure, you could get away with it, miss and be fine. It'd a little tough, but you're fine. In this era, you will get royally screwed.
I'm just starting to research getting a HELOC on my primary residence to use for capital for BRRRR projects.
What gets overlooked that hurts new investors?
I saw a lot of new investors get shell shocked when their rates rose from 4% to 9%. I mean, we all saw which way rates were heading but investors were still 'hurt'.
We had the option of a 3yr or 5yr rate lock. When rates are good, explore a lock to reduce this uncertainty. I wouldn't lock today though with rates expected to be on a downward trend.
We took the 3yr lock at 4.3%. Could've done a 5yr at 4.75%. Floating was 3.8% for reference. Our lock is expiring this year so we will pay it off but keep it open as an opportunity fund.
We got a first position heloc on our paid for house in '21 right before my wife quit working for good.
Always secure some favorable credit before you quit or change your primary employment.
HELOC is one the dumbest things to consider. Quit leveraging to leverage.
If you don't have the means to speculate, don't play ball. I don't care if the investment is intrinsic day 1, it's still straight speculation. Only people to really fight this notion are guess who? Lenders. No **** sherlock, they got a product to push.
soooo...I should Dave Ramsey it and pay cash for all my rental properties? Not sure what your constructive suggestion is here. Elaborate for the audience
Where did I say that? Just cause I said a HELOC is dumb doesn't mean I said go all cash, 0 leverage. I doubt your reading comprehension is poor, I bet your sensitivity is high and this got you triggered. Your impulsiveness makes sense on why you think this is a sound idea.
I said quit leveraging to leverage. You're taking leveraged funds(HELOC) to leverage(a house payment). Right?
Instead, go work and earn the 25% down & capable of amount of reserves. And go buy a house that fits this criteria. That's my constructive suggestion. My destructive suggestion is to never start a title with HELOC-the most important things to consider and get mad when someone says quit leveraging to leverage.
Clearly you're the overly sensitive one here when you're ranting and raving about how bad HELOCs are and making poor judgements and assumptions. If it makes you so emotional, best to just avoid the topic and this post
If we're debating with logic and facts, awesome I'm onboard. You're probably pretty intelligent, but your communication style detracts from that and could use some refinement.
Back to the point here, we all have to leverage something to leverage traditional financing on a property don't we? You recommend I just work and get the money for 25% down. I value the heck out of hard work so we're in alignment there. But I'm still leveraging my energy and efforts to later leverage a 30 year mortgage on a rental property. I thankfully make pretty good money and can probably save more than the average American could to invest in real estate. It'll still take time to save 25%...so there I'm leveraging my time.
If rates do the opposite of what the street is predicting, and HELOC rates were to rise, and I can still comfortably cover that higher HELOC rate, and all my other ducks are in a row, why not leverage the equity in my home if other ducks are in a row? You say its the "dumbest strategy", so the guests and hosts on the BP podcast who got their start with HELOCs got lucky? Or is it possible that any strategy can work if done properly?
I'm just starting to research getting a HELOC on my primary residence to use for capital for BRRRR projects.
What gets overlooked that hurts new investors?
I saw a lot of new investors get shell shocked when their rates rose from 4% to 9%. I mean, we all saw which way rates were heading but investors were still 'hurt'.
We had the option of a 3yr or 5yr rate lock. When rates are good, explore a lock to reduce this uncertainty. I wouldn't lock today though with rates expected to be on a downward trend.
We took the 3yr lock at 4.3%. Could've done a 5yr at 4.75%. Floating was 3.8% for reference. Our lock is expiring this year so we will pay it off but keep it open as an opportunity fund.
We got a first position heloc on our paid for house in '21 right before my wife quit working for good.
Always secure some favorable credit before you quit or change your primary employment.
Given your experience with using a HELOC once, is there anything you'd handle differently, especially since we're in a different market and economic environment?