"Refinance" Private Mortgage first with a HELOC?

Question

I am under contract to purchase a new primary and using private money for 80% of the purchase price.  I've been kicking around the idea of applying for a HELOC immediately after closing instead of waiting 6 months for a conventional cash-out refinance.

I spoke with Wells Fargo and they can do a HELOC up to 80% of the purchase price with no seasoning and I would have the ability to do 80% of the appraised value after 12 months.  They said it generally takes 5-8 weeks from application to closing.

I would use the HELOC to pay off the first and pay down the HELOC as I sell some other property.

It seems to me it is smart to use the HELOC as a first as opposed to a 15 or 30 year fixed because there will be times when I can have it completely paid off and not have to pay interest on my primary versus be locked in and have times when I just have cash sitting in the bank account.  If I need cash to purchase additional property I can just use the HELOC.

The only downside I can really figure is it will have an adjustable rate.

Am I missing something?  Anyone else do this successfully?

ARV $300k

Purchase price $185k

Repairs $30k

Thanks for your time!

Account Closed · Answer

@Chris Majors You've kinda left some important details.

What are the comparative interest rates. Does the Private Money have a Balloon? Does the HELOC have an adjustable rate? Will the bank NEVER close the HELOC? (Most HELOCs can be closed and no longer accessed based on arbitrary bank decisions.) Do you trust Wells Fargo? They are under investigation for creating 3.5 million fake accounts for people and charging them fees.

You can do a 15 year fixed and pay off principal when you have extra funds. HELOCs requirements change over time. As interest rates go up, and eventually they will, that HELOC will go up faster and farther.

Chris Majors · Answer

Hey Account Closed thanks for your response.

The private money is expensive, 12% interest only payments with a 35 month balloon.  As far as I know ALL HELOC's have adjustable rates tied to an index.  In this case the rate would be similar to what I could get on a 30YF (maybe a little less) and interest only.

I'm honestly not worried about WF closing the account or failing.  They're too big to fail, remember the bailout?  I have banked with them since they bought out Wachovia and love their online accessibility and the fact there are branches EVERYWHERE.  They were bad to deal with a few years back for home mortgages, but seem to be getting their act together.  I did a refinance with them lasts year and it went smooth as silk.  I still don't recommend them for my clients on a purchase, but that may change.  To be clear, I am NOT stuck on doing one with them, I'm still researching the best HELOC deal out there.

I'm not really interested in a 15YF, if I go with a conventional cash-out refinance it would be 30YF with no additional principle payments.  The benefit I'm seeing with having a HELOC in lieu of a conventional mortgage is the fact I only pay interest on the principle borrowed.  If I have a conventional mortgage I'm locked in to pay the interest for the life of the mortgage.  I also like the flexibility of having the line of credit for additional acquisitions, but only pay interest when I'm using the money (instead of doing a cash-out refi and having the cash sitting in my bank account).  There will be times when I can have the HELOC completely paid off, but others when I need the funds short term.

Andrew Postell · Answer

@Chris Majors Hmm, I'm not really sure about your market for HELOCs.  Those really large banks just seem to have so many issues with making it a smooth transition for these types of loans it might be worth calling to some mid-sized lenders...maybe some smaller ones too...to get a comparison.  You're borrowing thousands and thousands of dollars, even a small percentage difference can add up quickly when borrowing that much money.

Chris Majors · Answer

Thanks @Andrew Postell

Who would you recommend getting a HELOC with?

Andrew Postell · Answer

@Chris Majors ok, no problem.  If you have a method of paying that HELOC back then that is the less expensive method than a traditional mortgage.  I would encourage you to shop around for a HELOC.  Some banks might be smoother to get to closing than others.  Wells Fargo has had some issues with closing on time.

Chris Majors · Answer

Hi @Andrew Postell I am buying the house with a private money first mortgage.  I'm familiar with delayed financing, but it doesn't seem to be the best fit for me in this case.  If I were to do a conventional loan I would rather wait 6 months and do a 80% cash-out refinance based on the appraised value.  I would be able to pull all the cash invested plus a little.

The question I have is: 30YF versus a HELOC as a first?

30YF pros: Fixed monthly payments at historically low interest rate.

cons:  You are fixed into making the same payment regardless of the principle owed.

HELOC pros: Only pay interest on principle owed.  Interest only payments.  Line of credit can increase as property appreciates.

cons: Adjustable rate.  Potential for lender to call the loan?

Andrew Postell · Answer

@Chris Majors are you buying the home with cash?  If you are using private money, is it too late to have your private source structured as a mortgage from them rather than cash?  Also, you can absolutely get cash back on day 1 after buying with cash.  It's called "Delayed Financing".  I cannot remember if Wells Fargo allows it but you can 100% get cash back on day 1 if buying cash.  You will be limited to 75% of the purchase price OR your purchase price + closing costs...whichever is the lower amount.  So if no-one knows how to structure this properly buy giving you a mortgage with the private money you can still get a 30 year fixed rate mortgage on this property.  Feel free to ask additional questions if needed.  Thanks!