1st Lien HELOC On Investment Properties?

38 Replies

+1 for PenFed too , the only problem is that you can’t have more than 3 properties under your name.

@Brian Gerlach , thanks for the tag. I had trouble finding HELOCs in Texas, at first. Many lenders won't do any HELOC on an investment property, and Texas is a special kind of difficult.

These have done them: Frost (up to 18% interest).
Bank of Texas, no closing cost, and up to 80% value.

CUTX

Veritex is a community bank, but doesn't offer an equity product.

Hey Alec Hilliard, I have not heard of a bank allowing a HELOC on investment properties. I have heard Frost bank in Texas do a HELOC on your personal property. Unless someone else has a bank that does, let me know.

Originally posted by @Alec Hilliard :

@Kerry Baird - Bank of Texas said they can't do 1st lien HELOCs unless the house is paid off. And they can only do personal homesteads....not investments.

I'm a little confused at your reference to a first lien HELOC. For it to actually be a first lien the property would have to be 100% paid off. If you have a mortgage then the mortgage would automatically be the first lien, and so any heloc that you would try to get would by default be at least the 2nd lien.

Credit unions are typically much more flexible on what they will allow. Try talking to them about a HELOC on investment properties as I'm sure several of them can assist you, as others have mentioned PenFed offers this.

However if you only have 25% equity in the investment then it's unlikely that you will get approved for a HELOC in the first place no matter who you talk to.

 

@Ben Zimmerman let’s say the house is worth $280,000 and you get a line of credit for 200,000. You then take that line of credit and pay off the existing mortgage and so the line of credit becomes first lien. Which then allows you to pay off your house much quicker because lines of credit use simple interest. 

Originally posted by @Alec Hilliard :

@Ben Zimmerman let’s say the house is worth $280,000 and you get a line of credit for 200,000. You then take that line of credit and pay off the existing mortgage and so the line of credit becomes first lien. Which then allows you to pay off your house much quicker because lines of credit use simple interest. 

For lending purposes the HELOC would still start out in 2nd position, since they can't know for certain that you plan on using the HELOC to repay the mortgage. Once the mortgage is repaid the heloc would move into 1st, but for loan origination purposes it will be treated as a 2nd.

And this leads me to my next puzzling question, because a mortgage is also simple interest. A mortgage is simple interest compounded monthly, where a heloc is simple interest compounded daily. Since a HELOC charges a higher interest rate, you will be paying MORE in total interest by doing what you are trying to do. And even if the interest rates were magically the same, the heloc would still be more expensive because every 4 years you would be charged an extra day of interest for leap year that you wouldn't get charged in a mortgage.

@Ben Zimmerman

I get what you’re saying. 🙂 There are some banks that will automatically use the funds to pay off the mortgage so that they are never in a second lien position. Several of my friends have done this. And mortgages are amortize over 30 years so for the first 10 years you’re mainly paying interest only with no additional payments going towards principle.

Versus a line of credit is the daily balance. So you can pay it off quicker if you pay The same amount as you would with a mortgage and pay all of your bills through the line of credit. 

Like someone mentioned above, the “all in one loan”

You use the line like a checking account.

Originally posted by @Alec Hilliard :

@Ben Zimmerman

I get what you’re saying. 🙂 There are some banks that will automatically use the funds to pay off the mortgage so that they are never in a second lien position. Several of my friends have done this. And mortgages are amortize over 30 years so for the first 10 years you’re mainly paying interest only with no additional payments going towards principle.

Versus a line of credit is the daily balance. So you can pay it off quicker if you pay The same amount as you would with a mortgage and pay all of your bills through the line of credit. 

Like someone mentioned above, the “all in one loan”

You use the line like a checking account.

I'm unfortunately overly familiar with the concept of velocity banking and chunking that a lot of garbage financial YouTubers talk about.  I HIGHLY suggest you do more research.  Unfortunately people suck at math and can't see through the fundamental flaws in what the speaker is talking about.

Both a HELOC and a mortgage are simple interest loans. There's no magical math going on behind the scenes.

A 200k heloc with a 10yr interest only draw and 20yr repayment system at 4.5% interest is roughly 750/month for the first 10 years, and 1583/month for the remaining 20 years.  This means that you pay nearly 470k in total payments.  https://online.citi.com/US/JRS...

Contrast this to a 200k mortgage at 3%, and you will pay 843/month and a total payment of 303k over the 30 year loan.  https://www.mortgagecalculator...

The heloc ends up costing you 167k MORE in interest.  There is no repayment scenario where a high revolving balance at a higher interest rate is beneficial as opposed to a lower interest rate mortgage.  

Both a heloc and a mortgage are both simple interest, a heloc is simple interest calculated daily, and a mortgage is simple interest calculated monthly

HELOC daily interest is: daily interest = balance * rate / 365

Mortgage interest is: monthly interest = balance * rate / 12

Since the overwhelming majority of the money on a 200k heloc will not be repaid within that first month, or the first year, and instead continue to have their balances revolve from month to month for decades, the calculations come out the same.  A month is 30 days, or 1 month....Likewise a year is 365 days or 12 months, no matter how you look at it they are the same time interval.  So both equations then become: yearly interest = balance * rate.  At the end of the day 4.5 > 3, that's just how math works. As long as the balance is not being immediately repaid in very short time intervals, and instead is allowed to revolve from month to month, then there is effectively no difference in the calculations.

The calculations only become different when holding a heloc balance for VERY short time intervals.  So a heloc that is only held for 10 days before completely paying off the balance would only get charged 10 days worth of interest, where a mortgage being calculated monthly would bill you for the entire month instead of just 10 days.  However since the overwhelming majority of the money on the heloc will be a revolving balance for many years or decades, this doesn't really apply.

I HIGHLY suggest you further research this topic before going to talk to more lenders. 

Originally posted by @Ben Zimmerman :
Originally posted by @Alec Hilliard:

@Ben Zimmerman

I'm unfortunately overly familiar with the concept of velocity banking and chunking that a lot of garbage financial YouTubers talk about.  I HIGHLY suggest you do more research and I actually made a YouTube video myself stating that velocity banking as these other gurus talk about is a scam.  I even threw out an open ended offer to PayPal $1000 to anyone who can prove the heloc process to work and I will extend that offer to you as well (so far nobody has).  Unfortunately people suck at math and can't see through the fundamental flaws in what the speaker is talking about.

Both a HELOC and a mortgage are simple interest loans. There's no magical math going on behind the scenes.

A 200k heloc with a 10yr interest only draw and 20yr repayment system at 4.5% interest is roughly 750/month for the first 10 years, and 1583/month for the remaining 20 years.  This means that you pay nearly 470k in total payments.  https://online.citi.com/US/JRS...

Contrast this to a 200k mortgage at 3%, and you will pay 843/month and a total payment of 303k over the 30 year loan.  https://www.mortgagecalculator...

The heloc ends up costing you 167k MORE in interest.  There is no repayment scenario where a high revolving balance at a higher interest rate is beneficial as opposed to a lower interest rate mortgage.  

Both a heloc and a mortgage are both simple interest, a heloc is simple interest calculated daily, and a mortgage is simple interest calculated

HELOC daily interest is: daily interest = balance * rate / 365

Mortgage interest is: monthly interest = balance * rate / 12

Since the overwhelming majority of the money on a 200k heloc will not be repaid within that first month, or the first year, and instead continue to have their balances revolve from month to month for decades, the calculations come out the same.  A month is 30 days, or 1 month....Likewise a year is 365 days or 12 months, no matter how you look at it they are the same time interval.  So both equations then become: yearly interest = balance * rate.  At the end of the day 4.5 > 3, that's just how math works. As long as the balance is not being immediately repaid in very short time intervals, and instead is allowed to revolve from month to month, then there is effectively no difference in the calculations.

I HIGHLY suggest you further research this topic before going to talk to more lenders.

 


How do you explain what these "all in one" loan companies are selling then? 


I don't see how dumping in your paycheck, your "mortgage amount" and everything you make and then paying bills out of it, wouldn't in turn lower your daily balance, (which would lower your interest) making more of your money go towards the principle, = paying it off quicker?

Vs. with a reg. mortgage, if you pay extra, stop paying, the same interest and principle is due the following month. 
 

Lets assume a 200k heloc, and a relatively generous 10k monthly income paid in one lump sum on the 1st of the month, and 3k monthly random expenses.

This means on the first of the month the loan balance gets reduced to 190k as your paycheck goes towards repaying the heloc, then over the course of the month the heloc balance slowly creeps back up to 193k as your expenses start rolling in.  If we assume for simplicity sake that the bills come in uniformly throughout the month, then the average heloc balance for the month becomes 191.5k per day.

The problem is that you are getting a benefit on the (relatively) small 10k payment you made, and getting hurt on the massive 191.5k balance that stayed on the heloc the entire month at a higher interest rate versus a mortgage.

Months vary in length, but are roughly 30.4 days on average.  So by having that 191.5k as your average daily balance for the month your interest for that money becomes 191.5k *.045 * 30.4 / 365 = $717.73

Instead with a mortgage, you will pay the interest on essentially the full 200k for that initial billing cycle, so the interest that you would be charged on that money is 200k * .03 / 12 = $500  A difference of about $218 less in interest for that month.


And remember, any amount of overpayment that you make towards a heloc, could have just as easily been made as an overpayment towards your mortgage, which would reduce your loan balance by the same amount.  Instead of reducing your heloc balance by 7k from 200, to 190, back up to 193, you could have just as easily taken that 7k and applied it to the mortgage balance instead.  And since your being charged less in monthly interest with a mortgage, that means that pound for pound more of your money is going towards your loan balance, which will cause the mortgage to be paid off significantly cheaper/faster than a heloc.  That is why the heloc in the previous example ended up being about 170k more expensive.  Now that previous example of course that was assuming you made minimum payments for both the heloc and the mortgage.  The higher your additional payments, the faster you repay the loan, the less the interest rate effects you overall, however it is still a significant headwind and will be more expensive no matter how you look at it.  

If you could somehow find a heloc with the same (or lower) interest rate as a mortgage, then the heloc would be a good idea.  But I've always seen helocs at least 1.5% points higher, sometimes much higher.  

Updated about 1 month ago

Update: there is a time/place for 1st position Helocs. In fact I have one on my primary residence. My home is paid for and I have an open heloc with a $0 balance. I firmly believe in using leverage, but having my home paid for does provide some nice security. In addition I have easy access to large sums of money whenever I want it. So instead of going to a hard money lender at 10% interest + points, I can just as quickly utilize my heloc for no points and half the interest rate so I can be a 'cash buyer' when it comes time for my next purchase. So I pay cash and then use delayed financing to obtain a real mortgage on the property I just bought, and use that loan to repay my heloc. With high yield savings accounts and bonds paying essentially no interest, parking my 'cash buyer' money in my house via a heloc is the best return on investment since I'm essentially getting 3-5% interest rate by not having the mortgage payment on my house.

@Ben Zimmerman

This totally makes sense. So it looks like the consensus is that the HELOC only makes sense if you're wanting and access to that capital. (Vs putting an extra 10k toward a mortgage and a HVAC going out and you can't ask for that money back)

Basically if you have extra money sitting around a HELOC is better than just parking it in a savings account.

Thanks for your input! 😎

@Alec Hilliard

Though Zimmerman is correct in his calculations, he is incorrect in his conclusions that it's a scam. The whole process is what makes "velocity banking" work. The idea is to use the Heloc as your bank account. All excess monies are to stay in the Heloc thus paying down the principle faster, which in turn decreases the interest paid. Sort of like this run on sentence. He is correct in saying one could take the extra money and put it on the principle of the loan, but then you no longer have access to that money. With the Heloc you will still have access to that extra money you just paid to the mortgage.

There is no magic to it. It works when one uses the entire process. So often the opponents of this strategy only point out the math and not the whole process. The whole process is what makes it work.

So get a Heloc on your rental and put the entire rent to the Heloc while still maintaining some liquidity.

There are multiple threads over several years debating this subject.

Donate the $1000 to a charity of your choice.

PenFed advertises for the product you seem to want.

@Brian Cardwell  

Yes, there are multiple threads about this debate already, and I remember you specifically from the last major thread that had hundreds of responses, and by the end you were the only one advocating for this theory, and you were unable to provide any proof that it actually worked better than other options, despite dozens of people showing you in great detail why your method doesn't work well. If you want to contribute to this debate, then you should easily be able to describe a scenario (with the proper math to backup your claims) where using the HELOC like you describe will help you pay down your total balance faster/easier than would otherwise be achievable.

QUOTE: "So often the opponents of this strategy only point out the math and not the whole process. The whole process is what makes it work."  -- your 'process' ultimately boils down to simple math that a 5th grader can understand.  At the end of the day, this 'process' is nothing more than average daily loan balance * interest rate.  This math can be easily modeled, and calculated, and has time and time again been shown to be highly inferior in every way.

If you want access to your money and have liquidity, then you could just as easily open a HELOC and not actually withdraw any money and instead leave your heloc balance at 0. This way you would still withdraw your money at any point should you need to have access to it for whatever reason, but you aren't stuck paying literally hundreds of dollars per month in interest for no reason in the meantime.

Your method is more expensive, plain and simple.  And being the more expensive option means that your method is slowing down your progress as opposed to using a different strategy.  There is zero reason to ever keep carrying a high balance forward from month to month as a revolving balance on your heloc as opposed to a lower interest rate mortgage.  There are plenty of other ways to achieve liquidity than by wasting multiple hundreds of dollars per month in useless interest fees caused by having a high balance on your heloc.

My $1000 will stay comfortably in my pocket....  

So you obviously didn't read the rest of those threads. You would have read that I and one other actually agreed at the end of our discussion. The way you described it in your third paragraph is a great option but you are still using the HELOC as part of the equation.

In your forth paragraph you seem to not understand the process again. You are not carrying a high balance forward if you are doing it properly.  So the process works. Though you say it is not the best way, you do admit that it works. Send that $1000 to any charity you want. 

your quote "I even threw out an open ended offer to PayPal $1000 to anyone who can prove the heloc process to work and I will extend that offer to you as well..."

 We will just have to agree to disagree. My 30yr.  200k+ mortgage was paid off using this method  in a little over 6.5 years. So I say the proof is in the pudding. It worked for me. It has worked for many others. It was easy and comfortable for me. If you dont like it, dont use it.

Prior to 1913, many land/homeowners used the revolving line of credit to purchase their homes, farms and equipment.They actually used them like bank accounts by running all their monies through them. Then our Federal reserve was formed and mortgages changed forever in country. Banks changed forever. 

So to the OP here is the link to the PENFED website.  Just tell them you want to refi into a line of credit. The first person you talk to may tell you no but ask for a supervisor because they can do it.

https://www.penfed.org/home-eq...

This is an interesting topic. Ben is 100% right, if you are depositing the same amount every month, the lower mortgage rate will win everytime. 

I agree, this for the most part won't make any sense for most people.

However, I think to Brian's point, you are basically using it as a savings account. If you are getting that extra $5K a month, if you pay down you mortgage, you no longer have access to that money without refinancing. So if you want to stay liquid, you may not want to pay down your mortgage that much. If you pay down your HELOC $5K a month extra, you still have access to that money. So this type of setup only works if you are trying pay less interest by having a lower principle but you also want to be able to grab that that cash when you need it asap without having to refi.

That said, you are better off letting your money sit in the stock market. The S&P 500 satistically returns and average of just over 9% yearly. 

All that said, I don't really see a point in doing the Heloc if you already have a mortgage. If you do not have a mortgage and want that line of credit to use when investments pop up, that totally makes sense.