Is now a bad time to buy first investment, using HELOC?

Question

I can grab around 250,000 of equity on my primary home, using a revolving HELOC at 3.25% variable.

In my market, this will only fund a down payment.

Is this a good time to be doing this, considering there’s a recession on the horizon, and rates will only rise, and property prices are at historic highs?

Trying to figure out if it’s a good idea, or if I’m over-leveraging and should wait until things cool, or possibly wait for foreclosures to hit the market?

Andrew Garcia · Answer

Hi Account Closed, the biggest issue with a variable rate HELOC is that you could end up paying a really high rate. At the beginning of the year, rates were in the high 2s and low 3s. Now there are some products in the 6s. With the inflationary concerns, rates will likely go up.

Ensure that you can make the payments if the rate doubles. Otherwise, you can look into getting a fixed-rate HELOC or HELOAN.

Hope this helps! Let me know if I can be of any assistance.

Scott E. · Answer

You say a recession is on the horizon and foreclosures are going to be hitting the market. I was not aware...

(My point here is that, nobody knows what the future holds)

Dean V. · Answer

Standard "not financial advice" disclaimer (I hate that crap lol but such is the world nowadays), but my personal strategy right now is to take out as much *GOOD* cheap debt as possible since I agree with you that I see rates continuing to rise for at least the next few years as well as I suspect that inflation will still take quite a while to bring back down under control, pending what any potential recession might look like as you alluded to.

What do I mean by "good, cheap" debt?  To overly simplify: debt used to purchase an income-producing asset (like it sounds you're planning to use it for) that you can borrow at a rate lower than the rate of return you expect to get from that asset.Even if property prices decline during a potential recession, I think the general consensus is (and I tend to agree), that the most we'd see unless there's WW3 or another crazy black swan event would be a temporary pull-back of ~10%, and as long as you're still cashflowing based on income/expenses, you should have no problem holding until the market comes back up, which it inevitably will.What I would caution you on though is make sure to read all the fine print of the HELOC!  What are the specifics of the variable rate (probably Prime + a certain percentage), are you locked into 3.25% for a certain introductory period of time (maybe 12-18 months), how often can/does it adjust, what are the rate caps, what is the initial draw period (probably interest-only, this is where you can use it like a credit card, revolving) vs payback (likely unable to use it as revolving past this point, now payments are principal + interest amortized through the end of the payback period) [this is a common HELOC structure, but yours may be different], etc. - to be safe, make sure whatever deal you're investing the HELOC money into still works at your "worst case" rates, and/or have a plan to be able to pay back the HELOC early if rates spike so you can avoid paying that higher interest.Just curious - where are you living/what are you looking to purchase where $250K will only fund a down payment??  Wow, I'm in Denver and even here things aren't quite that bad (yet) haha!Have you thought about investing out of state where your money might go further and/or possibly get better returns (if cash-flow is important to you)?As long as you factor your worst-case HELOC payments into your expenses and your investment is still cash-flowing (including expected vacancy, reasonable reserves, etc.), I would not consider that to be over-leveraged, but everyone's risk tolerance is different so do what makes sense for you!Foreclosures is a tough one...I personally don't think we're going to see a big "wave" of them like some people were/are expecting, mainly due to how much appreciation we've seen over the past few years and how much equity almost everyone has in their homes right now.  It wouldn't make a lot of sense.  I think we'll get back to roughly normal foreclosure levels at some point soon, but seriously doubt there will be a big flood of cheap foreclosures at auction or REOs like 2008.Cheers,Dean