Using HELOC: for down payment or full purchase?

Question

Hi all,

What is your feedback using a HELOC of a primary residence to purchase rental properties?

1. Use for a down payment

2. Purchase house outright

In both cases, the interest for the HELOC will be higher than the interest rate from a conventional or DSCR loan (at least in my case).

1. Use for a down payment

The rent needs to cover the HELOC payment and the loan payment

Do lenders allow this?

2. Purchase house outright

The rent needs to cover the HELOC payment

If the house is refinanced, then the rent would need to cover the new loan payment as well as HELOC payment for the remaining 20% equity

Thoughts, feedback, corrections, please?

Kind regards,

LarryC

Andrew Postell · Answer

@Lawrence Cargnoni as mentioned above lenders are ok with this but I would encourage you to think about some things here.

HELOCs/Line of Credit are NOT designed to be a permanent financing solution. Two of the common areas of concern for HELOCs I see out there is the 10 year maturity date and the adjustable rate. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. What will rates be in 5 years? Who knows? That's called risk. Unknown = risk. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC, 10 years later it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when it matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

What HELOCs are designed for is to be a giant credit card. And just like any credit card, you need a plan to pay it back. So if you use it to say....buy another property. Then flip that property...thus paying back your Line of Credit. Then that's perfect! Because you will never get surprised by an adjusting rate or keeping a balance on it. Lines of Credit are PERFECT for people who have a plan to pay it back.

On the other hand, if you were going to use that Line of Credit for the downpayment on a property that you were looking to buy and hold for 30 years....this would be very counterproductive. You are essentially borrowing 100% of the property value. We don't even do that with our own primary homes. You would be bleeding money each month on a property that is leveraged 100% of the value.

So, while you can do it...maybe just think about how the math in this scenario works. Hope all of that makes sense. Feel free to reach out about this. Certainly here to help. Thanks!

Benjamin Aaker · Answer

I love using lines of credit for real estate purchases. As you say, the rate is higher, so I like to find strategies to pay off the LOC if possible.

You've got the most important thing down: The new property needs to cash flow its own mortgage plus the LOC. That can be tough to find.

I've done this multiple times and lenders have not had a problem. Your personal financials will have to be solid to get the LOC set up. Once you do, the money can be used for whatever you want.

Matthew Crivelli · Answer

Yes, some lenders allow you to use a HELOC for the down payment to purchase a rental property. I just helped an investor in CT purchase a 3 family with a DSCR loan this way. You do need to ask yourself, are you willing to risk your primary residence to purchase a rental? I personally view this as risky, but people do it all the time. If the rental income is disrupted for one reason or another, do you have enough personal income to cover the cost of the note(s)?

Using HELOC: for down payment or full purchase?

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