HELOC - Most Important Things To Consider?
Member since 2019 · 45 posts · 47 votes
HELOC - Most Important Things To Consider?
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Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes@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!
38 Replies
- Member since 2023 · 50 posts · 41 votes2y
Wow a lot of raw emotion over HELOCs. Lol.
For us, a HELOC is an amazing tool. Our primary is almost paid off so we have a large line of credit on the HELOC, enabling us to be a cash buyer.
The impact of being a cash buyer in real estate cannot be understated. It opens up off market deals, allows you to buy deals at deep discounts from the MLS and acquire properties who's condition makes lender financing difficult.
Doing this gets you properties that have immediate equity (especially after they are fixed up).
If keeping the house, we then refi the property back into a conventional mortgage and pay the heloc back to 0. The basic Brrrr method. Or flip it and keep the profit.
We dont want a balance on the heloc so we always have a few exit stratergies and make sure we have a healthy cash reserve to cover monthly debt payments.
If used responsible, a heloc is going to open up alot more opportunities.
As others have said, shop around. A good heloc should cost nothing with the only expenses being the interest rate.
good luck.
- 2yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
is this your very first BRRRR, or just your first time trying to fund all or part of the BRRRR with a HELOC?
- Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes2y
Lots of good information here -- just remember that during last housing crash, a lot of HELOCS got frozen, useless to those who counted on them or actually harmful to those who had a big balance and had to keep paying it monthly without getting to use it as they planned. A HELOC worked great for us starting out in rental property as it gave us the ability to buy with cash, mortgage the house once renovated and rented, pay back the HELOC and repeat. When we saw how they froze them during the crisis, we realized it would have caused us a lot of pain if we still used one then, as we didn't have much of a real emergency fund when we had a HELOC, thinking the HELOC would be our emergency fund as well. So HELOC can be a great tool, but make sure you also have an ample emergency fund just in case.
- Lender · Warwick Rhode Island · Member since 2023 · 37 posts · 20 votes2yThe HELOC will have a lower payment even though the rate is higher because all that the lender is looking for is the interest payment. I am posting pro HELOC comments because I see a lot of RE investors who have them and use them to help grow their real estate business. Today I do not have the ability to originate HELOC's so my comments aren't designed to generate applications.
Quote from @Christopher Mooney:
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
When used thoughtfully and as part of your overall plan, a HELOC can be a useful tool. - Lender · Saddle Brook, NJ · Member since 2023 · 431 posts · 231 votes2yGreat question!
Quote from @Zachary Cain Humphrey:
Quote from @Ryan Muska:
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?
For a 30 year HELOC, there may be 5 of those years where you can actually use the money (this is the draw period) whereas the rest of the 25 years are used to paydown the remaining balance at the end of the 5yr draw period.
You will also be required to make some sort of monthly payment during the draw period if you have a balance left on the HELOC. This may be principal and interest or it may just be interest-only.
But if you were to payoff the balance on the HELOC before the draw period is complete, you can use it again since there is still time remaining on the draw period.
Further, if you have a HELOC for $100k and need to use $50k now and the other $50k 6 months from now, you can do so! As long as you are not going above your draw limit, you can use it and pay it off as much as you want. Just like a credit card!
I hope this shed some light on the situation! - Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Ben Russell:
Wow a lot of raw emotion over HELOCs. Lol.
For us, a HELOC is an amazing tool. Our primary is almost paid off so we have a large line of credit on the HELOC, enabling us to be a cash buyer.
The impact of being a cash buyer in real estate cannot be understated. It opens up off market deals, allows you to buy deals at deep discounts from the MLS and acquire properties who's condition makes lender financing difficult.
Doing this gets you properties that have immediate equity (especially after they are fixed up).
If keeping the house, we then refi the property back into a conventional mortgage and pay the heloc back to 0. The basic Brrrr method. Or flip it and keep the profit.
We dont want a balance on the heloc so we always have a few exit stratergies and make sure we have a healthy cash reserve to cover monthly debt payments.
If used responsible, a heloc is going to open up alot more opportunities.
As others have said, shop around. A good heloc should cost nothing with the only expenses being the interest rate.
good luck.
It is just a coincidence but there's this story in tweeter from one lender how investor is doing overleverage using HELOC.
John Downs - Mortgage Advisor@AdvisorJohnA real #RealEstate story the RE Bros won't tell you.
To keep this short, it is the story of a house hacker who now owns 5 houses since beginning his journey in 2020. All strategic, low down payment, underwriting acceptable move-ups using owner-occupied financing.
- Investor · KY · Member since 2022 · 204 posts · 77 votes2y
Quote from @Ryan Muska:
Great question!Quote from @Zachary Cain Humphrey:
Quote from @Ryan Muska:
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?
For a 30 year HELOC, there may be 5 of those years where you can actually use the money (this is the draw period) whereas the rest of the 25 years are used to paydown the remaining balance at the end of the 5yr draw period.
You will also be required to make some sort of monthly payment during the draw period if you have a balance left on the HELOC. This may be principal and interest or it may just be interest-only.
But if you were to payoff the balance on the HELOC before the draw period is complete, you can use it again since there is still time remaining on the draw period.
Further, if you have a HELOC for $100k and need to use $50k now and the other $50k 6 months from now, you can do so! As long as you are not going above your draw limit, you can use it and pay it off as much as you want. Just like a credit card!
I hope this shed some light on the situation!Thank you! That was very helpful. I have never used a Heloc before, but I am highly considering it.
- Lender · Indianapolis IN · Member since 2024 · 31 posts · 7 votes2yha! Hi Christopher, have you looked into 1st lien HELOC's this is a unique and interesting option for real estate investors. Principal is paid down quickly, therefore freeing up equity at a more rapid pace. Interesting product that many RE investors take advantage of. Good luck!
Quote from @Christopher Mooney:
Quote from @V.G Jason:
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
- 12 Penns Trail Suite 138 Newtown, PA 18940 · Member since 2023 · 1k+ posts · 319 votes2y
Hey Chris ! Are you looking to leverage the equity to acquire more loans or do the projects fully in cash ? If its to refinance after the project is complete you want to cashout upto 75% and pay back the loans outstanding . All depends on the numbers and timelines
- 2yKerry BairdPro MemberRental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
@Christopher Mooney, Navy Federal offers a longer than usual draw period, fwiw. It is one I'd readily consider for my primary. It is much harder to get a HELOC on an investment property, but Navy offers those, too.
- Member since 2019 · 45 posts · 47 votes2y
Quote from @Nicholas L.:
is this your very first BRRRR, or just your first time trying to fund all or part of the BRRRR with a HELOC?
Would be my first BRRRR! This is probably my biggest hesitation. I've got a good paying, very stable job, so I could likely eat the monthly costs of a HELOC for a while if things went terrible. Prefer to avoid that of course lol
- 2yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
understood. using a HELOC for part, or all, of the costs of a BRRRR increases both ( 1 ) the cost, and ( 2 ) the risk.
as i suspect you're aware, with a BRRRR you're trying to do (at least) two things: ( 1 ) increase the ARV of a property enough that you can refinance at least most of your capital out; and ( 2 ) have a cash flowing rental. current interest rates have made the second of those very difficult, especially if you're using a DSCR loan and not a conventional loan. using a HELOC for part, or all, of the BRRRR makes it even more expensive, because you're relying on that refinance to pay off increased borrowing costs. appraisals are unforgiving because the appraiser doesn't care how proud you are of the project or how expensive your capital was.
so, folks in the forums are urging you to be cautious. my latest BRRRR didn't appraise AND wasn't going to cash flow - 0/2 - so i sold it. that turns it into a flip. i made a little bit but it was a long time to spend on a project to not keep it. my previous ones were successful because interest rates and borrowing costs were lower on both the buy AND the refinance.
hope this gives you some things to think about. every step of BRRRR is tough right now.
- Member since 2022 · 18 posts · 5 votes2y
Quote from @Nicholas L.:
understood. using a HELOC for part, or all, of the costs of a BRRRR increases both ( 1 ) the cost, and ( 2 ) the risk.
as i suspect you're aware, with a BRRRR you're trying to do (at least) two things: ( 1 ) increase the ARV of a property enough that you can refinance at least most of your capital out; and ( 2 ) have a cash flowing rental. current interest rates have made the second of those very difficult, especially if you're using a DSCR loan and not a conventional loan. using a HELOC for part, or all, of the BRRRR makes it even more expensive, because you're relying on that refinance to pay off increased borrowing costs. appraisals are unforgiving because the appraiser doesn't care how proud you are of the project or how expensive your capital was.
so, folks in the forums are urging you to be cautious. my latest BRRRR didn't appraise AND wasn't going to cash flow - 0/2 - so i sold it. that turns it into a flip. i made a little bit but it was a long time to spend on a project to not keep it. my previous ones were successful because interest rates and borrowing costs were lower on both the buy AND the refinance.
hope this gives you some things to think about. every step of BRRRR is tough right now.
@Nicholas L. Since BRRRR is difficult in 2024, what strategies are you using. I'm very new and have not found my first deal...just getting into it! :)
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