Newbie here trying to understand how many mortgages I will be stuck with. Let's say I have a million dollar home, with 500k equity in it. I would like to pull this out with a HELOC and put it as my down payment for a second home for a buy and hold strategy. If this HELOC matures in 10 years, will I be stuck paying three mortgages? One for my first house, one for the HELOC converting into a regular mortgage, and one for the second investment property?
The HELOC is subordinate to the original mortgage, so you will be paying the original mortgage, the HELOC, and the investment property. You will pay the HELOC only if funds are drawn, akin to a credit card. As soon as funds are drawn and the statement cuts with a balance showing, you will be responsible for the minimum payment at that time.
The HELOC is subordinate to the original mortgage, so you will be paying the original mortgage, the HELOC, and the investment property. You will pay the HELOC only if funds are drawn, akin to a credit card. As soon as funds are drawn and the statement cuts with a balance showing, you will be responsible for the minimum payment at that time.
People usually use HELOCS with the intent to pay them back within the 10 years. My advice would be to use it for the down payment and then when your investment property gains 20% more equity, do a cash out refi and pay off your heloc. HELOCS often time have variable interest rates so it’s best to refi out and into a 30 year low interest rate loan. I'm using my heloc to build an ADU and will pay that off using the rent from the ADU. Any money leftover will be used to help with a down payment and furnishing my first short term rental.
We have and use a HELOC. Personally, I never plan to wait more than one year to get out of the HELOC. Typically it is a quick flip deal, refinance within 1 year, etc. The adjustable rates deter us from doing anything more than quick transactions with it.
Used our HELOC to make cash offers in the past year, but thankfully we have not had to do that with the shifting market.
What I am trying to say is that HELOCs can be a good tool but should only be used when you have a lot of exit options and plan to move that property through selling it or refinancing it in the immediate future. You do not want to be stuck with a high adjustable interest rate.
Generally, I don't want to use my HELOC unless I am confident I can pay it off or refi out within 24 months. A HELOC really should be an alternative to HML and I like to think of exit strategies in the same way.
The benefit of the line of credit (home equity line of credit, or HELOC is one type) is that the funds are sitting there available when you need them and you don't pay interest until you use the funds. The downside is what the others have said: variable, higher interest rate (usually). Because they cost more, the lines of credit are best used as a short term option. If you plan to keep the loan around for 10 years, you would likely do better to simply refinance your home.
Others have already commented the answer, which is you would have three loans to pay. With a HELOC you only pay on what you use.
I took a HELOC from my first house hack to buy the second and just signed off on my new HELOC to buy more properties.
I disagree with the above that you should do a cash out refinance to pay it off. The reason being is if you have an opportunity to pay of your HELOC, you now just opened up cash flow. If you make that same payment towards your cash out refi, then all you did was shorten the loan lifespan, not actually lowering your monthly payments (unless you have some unique program where the mortgage will recast/readjust the monthly payments).
The other thing to factor in is you had an owner occupied rate the first time around. This means if you do a cash out refi, it would be at an investor's rate, which is usually higher. Therefore you need to look at the "blended" rate to see if it makes sense. This is assuming you don't do a cash out refi on your new primary to pay off the HELOC.