Home Equity loan for down payment?

Question

I am buying a house for way uner value in 2 months. I was going to take a home equity loan out in a few years and put 25K down on a duplex. Someone told me that it is very hard to get a mortgage if you took out a home equity loan for your down payment. Is this true?

I wanted to roll the down payment over by taking out a home equity loan on the duplex and buying another duplex. I wanted to maximize the profit on the duplex before purchasing the next one. The start the cycle over again.

Is there a better way to do this? What about using a home equity loan for a dawn payment?
thanks
Steve

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Yep.  Debt is debt, according to a mortgage broker or banker.  Whatever mortgage, HELOC, credit card, car loan, furniture store, etc. payments you make each month, that all goes into the debt/income ratio calculation.

As for paying it back, monthly payments are based on how much you've used.  Each month you get a statement (just like a credit card) saying how much you owe that month, and it's Interest Only.  If you pulled out $10K and your interest rate is say 11%, you're montly payments are (roughly) $91 per month.  Each month that is what you owe unless you pull out more money from the HELOC.

You CAN pay extra to bring down the principle amount you owe.  HOWEVER, some HELOCs have a pre-payment penalty, so read the writing very carefully.

Emrah

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Okay, I have heard of that. How do you pay it back in terms of payment amount? Just like a credit card?

When applying for another mortgage does it look the same if I have a 150k mortgage or 120k mortgage and 30k owed in a HELOC?

Thanks for your help, I feel like I am learning alot here already.

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How does a HELOC work? Is it a loan where I pay only interest but have to pay the full mortgage off by a certain date?

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Home Equity Linne Of Credit.

1.  Whomever you want to open it with (bank, mortgage company, whatever; they all do it), you go to them and tell them you want to open one.

2.  They send out an appraiser to your house.  They determine what it's worth.  Then subtract what you owe.  The difference is the equity you have in the place.  Example:  House market value = $200K.  Owe $150K on mortgage.  Equity = $50K.

3.  They tell you that you can open up a Line of Credit worth $50K (as per example above).  And that's just what it is; a line of credit.  You'll get a bunch of checks.  You can use them to pay or buy anything (but you really shouldn't; people treat them like credit cards (which is pretty much what they are) and get into more debt that works against them).  Basically, you have up to $50K to use however you want.

It is free to open a HELOC.  You DO NOT pay on just an open credit line.  You ONLY pay (usually Interest Only) on the amount you use.  If you write a $10K check for something, you'll be paying monthly payments based on the $10K you used, not the full $50K.  You pay for what you use.

Emrah

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Also, you get charged when you refi.  Opening up a HELOC is usually free.  It's a few thousand dollars you're saving up front.  It may seem "small" in the big picture, but again, how long will you keep it?  When will you sell/refi again?  It could add up.

Emrah

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Yes, it IS debt, but remember that all HELOC payments are Interest-Only (yes, you CAN send extra to pay it off).  The beauty of that is every penny you pay each month to pay the HELOC is tax-deductable.  Is it better than re-mortgaging?  I dunno.  I did the HELOC thing to buy my first rental.

Either way, your money is "tied up" in the investment property until you sell it.  With a re-mortgage, you cash it out, pay it towards the new house, and that's it.  With a HELOC, you're paying each month on top of your mortgage(s).  However, when you re-mortgage, you've now got a higher mortgage, so you're paying more on that as well.

I'd do the math either way and see which is most profitable for your needs.

Emrah

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I would actually remortgage. I am not sure if that is the same has a home equity loan. But I intend on remortgaging and having my monthly debt at $1100 mortage+$100 Credit Cards. I have no other debts. This sounds acceptable to me but I know nothing and would apprectiate help.

Marvin Valencourt · Answer

You'll want to wait for some replies from the real financial types before taking anything to heart but I'd say it wouldn't make anything more or less hard. Equity is a form of savings and you're just tapping it using a hel. From my experience, and assuming your ability to pay is apparent, generally no more emphasis is placed on one kind of debt over another. I suppose some might look at a home equity loan as "better" than an equal amount of credit card debt but if you owe $25k it's still $25k and it would only matter if your income was "borderline". If you've demonstrated the ability to make your payments then it becomes a judgement call and would depend on who you're asking for credit from.