1st Lien HELOC On Investment Properties?
Rental Property Investor · Sherman, TX · Member since 2019 · 49 posts · 21 votes
1st Lien HELOC On Investment Properties?
Most Popular Reply
Member since 2020 · 119 posts · 56 votes
6y@Alec Hilliard we just got a home equity loan from TD Bank, they are were willing to do a HELOC on rental property
38 Replies
- Rental Property Investor · Sherman, TX · Member since 2019 · 49 posts · 21 votes6y
What if you have 25% equity in the property? @Balaji A.
Most credit lines just work off your LTV?
- Investor · Springfield, MA · Member since 2017 · 31 posts · 11 votes6y
@Alec Hilliard :PenFed had a 75% LTV limit in TX. ( assuming you are buying in TX) ; Also watch out the rate. They have a floor of 4.75% and a cap of 18% !!!!
- 6yKerry BairdPro MemberRental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
@Brian G., 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.
- Rental Property Investor · Sherman, TX · Member since 2019 · 49 posts · 21 votes6y
@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.
Maybe I'm not asking the right questions?
- 6yKerry BairdPro MemberRental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
@Alec Hilliard, the homestead protection situation makes Texas a difficult nut to crack. Have you tried the All in One at Ridge Lending Group?
- Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes6y
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.
- Rental Property Investor · Sherman, TX · Member since 2019 · 49 posts · 21 votes6y
@Ben Zimmerman exactly. There are some banks that will provide enough line of credit to pay off the existing mortgage and enter into a first lien position. That is what I’m trying to find.

- Rental Property Investor · Sherman, TX · Member since 2019 · 49 posts · 21 votes6y
@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. 
- Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes6y
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.
- Rental Property Investor · Sherman, TX · Member since 2019 · 49 posts · 21 votes6y
@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.
- Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes6y
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.
- Rental Property Investor · Sherman, TX · Member since 2019 · 49 posts · 21 votes6y
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.
- Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes6y
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.
- Member since 2020 · 119 posts · 56 votes6y
@Alec Hilliard we just got a home equity loan from TD Bank, they are were willing to do a HELOC on rental property
- Rental Property Investor · Sherman, TX · Member since 2019 · 49 posts · 21 votes6y
@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! 😎
- 6yBrian CardwellPro MemberInvestor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
@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.
- Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes6y
@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....
- 6yBrian CardwellPro MemberInvestor · Odenton, MD · Member since 2017 · 204 posts · 144 votes
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.
- 6yBryan MartinezBusiness MemberLender · Austin, TX · Member since 2019 · 22 posts · 6 votes
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.
- Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes6y
Originally posted by @Brian Cardwell:
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.
My suggesting using a heloc and carrying a constant 0 balance for liquidity reasons, is night and day different than what you are describing of using a heloc and putting your entire 200k+ mortgage onto your heloc. Nobody said that helocs are universally terrible, they are only universally terrible if people are using them in the way that you are advocating. My suggesting carrying a 0 balance heloc was just one example of me giving options for liquidity, but there are dozens of other options rather than simply constantly carry a high heloc balance. You could use a zero APR credit card for 18 months, you could use an unsecured loan, you could do just about anything and come out financially ahead as opposed to paying an extra 1.5% on a 200k balance for no reason. Heck, you could just use a regular credit card at 20% interest to buy that 10k HVAC that unexpectedly needed replacing and you would still be better off.
If immediately after putting 10k towards your heloc you suddenly needed 10k for an HVAC unit that unexpectedly went out, then you would be paying 200k * .045 * 30.4/365 = $749 in interest for that month,
I would pay (190k * .03/12) + (10k*.2/12) = 475 + 166 = $641 in interest for the month. So during a worst case scenario where I suddenly have an unexpected expense and am paying heavily for that expense at a massive 20% interest rate, I STILL PAY LESS than you do by over $100 per month. And in another month or two when that HVAC unit gets repaid and I'm no longer paying that 20% interest rate, then I will be paying SUBSTANTIALLY less than you in interest per month.
Your second comment of me not understanding how it works, and that you aren't carrying a high balance.... Yet you don't even attempt to explain what I am supposedly not understanding. In the end it all boils down to average daily balance as I have said multiple times. You fail to show any relevant proof that your method actually works well. When challenged on the topic, you simply state that nobody understands but you. Please enlighten us all.
QUOTE: "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."I do not doubt for a moment that you paid your mortgage off in 6.5 years. But that had nothing to do with the fact that you were utilizing a HELOC, and everything to do with making significant overpayments beyond the minimum towards your balance. You could have made those same overpayments towards your mortgage instead of your heloc, and had your home paid off in 6 years, as opposed to 6.5 years.
The Heloc was not the reason why you were able to pay your home off faster, the heloc slowed down your progress as opposed to simply doing a different method. ANY loan can be paid off rapidly if you throw enough money at it, I could buy a house with a credit card at 20% interest and have the house paid for in under a year if I made 100k monthly payments towards that house. But just because I paid the house off in under a year doesn't mean that it was a smart idea, or that buying a home with a credit card should ever be done. Likewise the fact that you paid your home off in 6.5 years doesn't mean much, the only thing that matters is was this the best way to go about things? And that answer is a resounding No, because with the same amount of monthly payments you would have paid your home off even faster and with less effort, had you done something else. Why would you put so much effort into setting up this system, obtaining the heloc, changing your banking setup, moving the due date for your bills etc etc, just to have this process be financially inefficient and slow down your overall progress?? There are 10x better ways to obtain liquidity if that was your only goal.
If I went around advocating that people buy homes on credit cards at 20% interest when they could have instead been approved for a mortgage at 3%, then people would call me an idiot because it is a super expensive way to buy a home. But technically you CAN buy a home with a credit card, and technically the process does work. It just works extremely poorly and inefficiently. That is the same thing that is happening with your heloc. It can work, and it does work, its just horribly inefficient and almost any alternative you can imagine beats it. Literally any loan 'works' if you throw enough money at it. Even outlawed predatory lending loans technically work, you just have to throw enough money at it. Likewise the heloc method 'works', but only if we use that previously defined definition that any loan technically 'works' if you throw enough money at it, because just like the credit card example, or the predatory lending example, your heloc WILL cost more money.
The heloc process is a scam because people claim that it works better than other methods, which it certainly does not. There are NO realistic circumstances where a 200k heloc at 4.5% will ever be financially superior to a 200k 30 yr mortgage at 3%. You going around linking and telling people to refi at penfed is a horrible idea that WILL cost people more money. People like you saying this heloc method is a good thing, when its clearly not a good thing is what makes this a scam. This heloc method will cost more money, and as I've mentioned if all you wanted was liquidity there are better, cheaper ways to go about it.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.