Which path would you take to a HELOC in my situation?

Question

My primary residence is a live-in rehab that is still ‘in process.’ The two remaining projects are finishing the yard (irrigation system, sidewalks, grass, fencing and flowerbeds/trees/bushes) and building a garage. I have cash for most of the yard project, but I want to finance the garage.

My end goal is to obtain a HELOC to aid my start in RE investing.

My question is this, knowing that different loan options have different requirements, interest and closing costs, what is the best path to financing the garage now and getting a HELOC after completion? A few options that I have researched are: Personal Line of Credit, HomeStyle Home Renovation Loans and 203k loans, but I’m sure there are other options that I am not aware of.

Here are the numbers:

• Current loan balance is $150k @ 4.5%
• Estimated cost of the garage is $25k to $30k
• ARV is $250k to $300K

Any advice offered will be much appreciated! Thanks in advance.

Brian Webb · Answer

@Kevin Romines Thanks for the help! This definitely makes the most sense for me to pursue. This has been very helpful, thank you!

Kevin Romines · Answer

@Brian Webb When you take out the replacement HELOC, the balance that you have on the initial HELOC will transfer over to the new one. The only reason to take out the 2nd HELOC and replace the 1st one is because in theory, you increased your value and you want the larger HELOC to coincide with that increased value? I would plan on accelerating the payoff of the HELOC so you have more available balance to invest.

I would discuss this with whoever you get the HELOC with so they know your plans up front. I would also ask them how they determine value, all companies are different on that front? You want to feel confident that in the way the lender determines value, that the addition of the garage will increase value with their methods?

As far as where to get your HELOC's, we do them but there are better out there. I would focus on credit unions to see who has 100%. I would gravitate toward those. Most HELOCS have close to the same rates, so concentrate on those with the highest CLTV and the additional features you might want?

Pen Fed credit union will only go to 90% on the owner occupied, but they also have HELOC's for rentals up to 80%. If your going to start investing, I would at least consider them when you need a HELOC on a rental. HELOC's on rentals are not offered by 99% of the lenders out there, they are rare commodity and Pen Fed has the highest CLTV.

Brian Webb · Answer

@Kevin Romines That's very helpful, thank you. I hadn't thought about a HELOC to build the garage and HELOC again later. That's a great idea!

In that scenario, would you just keep the balance money used in the first HELOC in the HELOC and repay?

Also, does it make any difference where you get the HELOC from? Is there any benefit to using the bank that holds the primary mortgage? If not, what are the better options for HELOCs? Is there a benefit to using a local institution vs and Online institution?

Kevin Romines · Answer

Hmmm, well I hate to see you give up a 4.5% rate but the best program for that, that would also keep your rates low would be the Fannie Mae Homestyle Renovation loan. I like that one better than the FHA because you have mortgage insurance that can be cancelled if its determined (by way of an appraisal) that you have 20% equity. FHA mortgage insurance is for the life of the loan. Building the garage could help you get over that threshold?

I would then follow up that loan with the HELOC from there.

Or another option is to just go get a HELOC for the most that you can get now. Use the HELOC TO build the garage. If it makes sense, then just replace the HELOC with a new HELOC after the garage is built due to the increase in value. I like this method because the closing costs on a HELOC are zero or close to zero, so your not adding much debt by way of closing costs.

If you have mortgage insurance on the loan now, I would build the garage and then ask the existing 1st mortgage to remove the MI. Then after that was done, replace your HELOC with a new one up to 90-100% CLTV.

Brian Webb · Answer

@Kevin Romines I would love to hear your thoughts on this.

Which path would you take to a HELOC in my situation?

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