HELOCS 1st LIEN as primary financing

16 Replies

There is a property that the owner owes 133K, and wants 191K. ARV is 238K. I want to get this house under a 1st lien HELOC. I wanted to use hard money to get the property quickly, and then get the HELOC to secure the house, but then the hard money lender would be first lien, correct? Then that would mean I would have to get a mortgage in my name to transfer the deed to me, then transfer to a 1st lien HELOC. Is there an easier way to get from point A to B?

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@Account Closed Just pay cash would solve a lot of my problems. But I assume that is the only answer. I am in the middle of a refinance and it is taking a while so I don't have any cash to use. Thanks for your input.

@Charlie Nghiem after you have been on this forum for a bit you learn who to ignore ^^^^ as their contributions are minimal at best.

A HML acts just like a normal lender in regards to lien position. You can use a HML to acquire the property quickly, then refi to get better terms. The other lender (mortgage) will be in the 1st position after the refi.

I hope that answered your question, not sure though???

@Mike Hanneman I was trying to see if I could eliminate a couple of steps to save money and time. I have to use the HML to aquire property quickly, but wanted the property under a HELOC 1st position lien, which would let me pay off the property faster since their is no amortization. I just wanted to go from HML to HELOC without refinancing to a conventional mortgage inbetween.

But i figured the only way around this is literally to pay cash, which means that I have to get a personal loan or borrow money. This is correct, yes?

Once you have purchased the property with the HML then pay it off using your HELOC. I believe that if you pay off the HML with the HELOC then the property would look like a free and clear property. Your other property with the HELOC would then just have esentially 2 mortgages on it. Am I seeing this correctly?

I'm not that knowledgable about using "no amortization strategies"

Have you factured in what the difference in interest rate would be using a HELOC verus a conventional mortgage? Do the numbers still work using this strategy then?

I persoanlly would concentrate on getting the property closed on and then worry about what way to refi. This is a cash flowing property with the HML as a lender correct?

@Mike Hanneman Yes, it would be a cash flow property with a HML lender. Right now just need to close on it. Might be making things complicated too soon.

Amortization applies to any loan that you pay back with regular monthly payments, so I am using the word wrong when I say no amortization. If I have a $100,000 mortgage at 5% interest on a 30 year note, I would expect to pay $600 /mo. With a conventional mortgage you spend more money paying off the interest and barely touching the principle. With a $100,000 heloc at 5% and $600 /mo I would pay it off in 23 years and save about $20,000 in interest. With the heloc I would bring down the principle faster, effectively lowing my interest payments, especially if I use the extra cash flow from the property and put it toward the loan. I can do the same thing with the mortgage, but still would be more effective under a heloc. 

I believe I explained it correctly. I only have read this and taken a look at the numbers. But I am excited to use this method to pay off the properties quickly.

Don't HELOCs start at a higher interest rate than a regular mortgage? (And that's not even worrying about the fact that the ongoing interest rate is VARIABLE).

And if you pay back the same dollars each month, would a HELOC REALLY be paid off sooner?

@Mike Hanneman , I think you are misunderstanding @Charlie Nghiem 's premise regarding HELOCs (unless I am). I believe Charlie is referring to a HELOC taken out on the Investment property (which should more properly be called a LOC, or ELOC) rather than Charlie's primary residence. Of course, if a HELOC on the primary was possible - why use a HML at all?

[Because, UNTIL the HML is paid off, there can be NO LOC on the Investment property]. Cheers...

@Brent Coombs I ran the numbers again and it seems like the payoff would be the same. I was using an online mortgage calculator and it might of added in some other variables, so it looks like it is all equal. So that's incorrect.

But, even then I would be using the LOC as a "checking account" for the property, meaning all cash flow goes back into LOC. Whenever I need to pay property taxes, or replace a roof, ect, I would draw from that account. And it all should work as long as I am cash flow positive, even with variable rate interest? I would still be putting $5-600 on top of the payment. The same could be said for a regular mortgage, but you wouldn't put all your cash towards the payment, as you need cash for maintenance, repairs, and taxes.

I like the idea, but again I have not tried this method yet.

The property needs renovation on the inside, so I don't believe I can get a LOC until everything has been repaired, which is why I needed the HML or personal loan to acquire it first, if I am correct.

@Charlie Nghiem , Welcome! 

I think I might be confused, unless I misread the above. What it sounds like is that you are purchasing a property with an interest only loan?

  • Whether its hard money, usually at 12% 12 month term
  • Or HELOC which is usually 10 year interest only and 15 year repayment. (Both can vary in terms) 

I think you're creating WAY too much work for yourself. How much money do you have with your HELOC? That is CASH that you draw on, I was told its like a giant credit card for your home. If I were you I would make the cash offer with your HELOC to get the property. That way you don't lose TONS of money with:

  • Hard money WILL have regulations on credit and income
  • You will have to get an appraisal
  • You will have to show experience with previous investment properties (My area requires 4 deals)
  • You WILL owe that balance at the end of the term (If not you will get buried in extension fees) 
  • POINTS! This is by far the hardest part of HM for me. It just eats up my profits like an alligator 

Versus: 

  • HELOC. Your money, cash offer, lower interest rate, longer repayment period.

I see this as an easy decision? Also, you can do a cash out refinance after the 6 month seasoning period now. (I have found multiple banks willing to do so under the 75-80% LTV.)

@Scott Hollister I did a cash out refi on my own property already, which got me less than half of the asking price. Which is why I thought about using a HML to get me the rest of the way. I really don't want to use them, but just don't really know another option that is available to me (After a refinance). This deal was very complicated to work out, and there would be barely any cash flow until I could get it refinanced, which I wanted to do a month or two after purchase and rehab, but would have to pay a penalty to a HML.

But the main point of my post was acquiring a property and refinancing it to a 1st lien HELOC. So since I couldn't offer the full amount I would use the HML, then I could refi into a conventional mortgage, and 6-12 months I can refi to the HELOC. This is the only way to do it as I am understanding.

I didn't know that I had to have deals in my pocket to use a HML, so that is something I am going to have to look into if I continue to go that route. Thanks for the info.

@Charlie Nghiem , go to a local bank that does portfolio lending.

Then speak to someone in their commercial division about a commercial LOC or mortgage. They will give you up to 75% LTV and maybe 1 or over residential but overall cost should still be lower than HML.

@Percy N. Its funny, I was just listening to an old podcast about someone who used portfolio lending, but made it seem like you had to have a track record already to use them. I read up more about it after you mentioning it and will call some small banks to see what the requirements from them are. Thanks for the tip. 

@Charlie Nghiem

If you can make it work with hard money, do it. 

Find a new lender if they charging you a penalty. (They should be happy to collect the points you are paying. Remember YOU ARE offering them a deal) Talk to the owner and take him out to lunch, maybe you can work a line of credit at a fixed rate? I've seen this done before. Remember you are selling yourself as a business and someone to believe in! Believe in yourself! 

I'm just going off my gut on this one but I don't think a HML would take a 2nd position on the house. They might want a 1st position and you as a 2nd unless you have enough equity to protect all parties involved. (This is a good question to ask a HML)

It all depends. I just had a normal mortgage in my name before my first HML. But I sat down with the VP of financing for lunch and I presented myself as someone to invest in. I had a plan and I told him I can find deals! I just needed the financing piece, he took a chance and it has worked out for everyone.

Is HML expensive? YES

Do i cash flow with a HML? NO (It carries the property until i can refi out)

BUT do i wait the 6 months to eventually have a cash flowing property? ABSOLUTELY


So now you must decide, do you take the deal and make some money...

P.S. contact RCN Captial to see if you can work a deal out. Contact Chris Dorin who helped me out with my last deal. (They are nation wide) I don't make any money off this recommendation and my mother is in the closing department. (It helps to have someone on the inside!) What's 5 minutes of your time to see if it will work? 

CHRIS DORIN

Loan Officer

RCN Capital is proud to announce that we are lending in the state of California! To learn more, click here.

75 Gerber Rd East, South Windsor, CT 06074

RCNCapital.com

Charlie,

Scott made some excellent points (no pun intended:). I think some of your descriptions of your different mortgages and using the term HELOC may have caused some confusion in this post, so I will just speak to the HELOC side of things (because Scott covered HML quite well).

You are correct in that a HELOC is like a giant credit card attached to a residence. HELOC's are the absolute BEST way to get cash fast in you need to do quick deals. A HELOC works literally just like a credit card, and the bank does NOT amortize these. They are usually based off a 30 year amortization table (to calculate the interest), but no principal is being paid. In essence, you would only owe them (assuming a 4% interest rate on $100k) $333.33 (give or take depending on the term they are using to determine payback). So the $600 payment on a traditional mortgage includes principal, but the HELOC does NOT. The reason this tool is so useful is that you can opt to pay it all off (for no penalty) whenever you want, or literally pay the bank "interest only" forever. Like me, it sounds like you would like to use it as the tool that it is, and that's to keep paying as much as you possibly can on it, so that you have access to the cash when you need it. Where some people get in trouble, is they use the HELOC (like a credit card), max it out on stuff that doesn't create income or wealth, then markets shift, and they are under water. Most people on BP are not like that, and we are all here to help one another make good sound decisions, so I would bet most of us would NOT make those poor decisions. For the record, I LOVE my HELOCS. I have two large ones on high equity properties. I also have 15 year mortgages on those two properties, so even if I "add" to my debt on some months, I am reducing principal and gaining equity substantially each month as well. My HELOCS allow me to use them for anything, and as a real estate broker, I can get large closing checks and simply drop those $$ right on the HELOC. My $.02.

@Scott Hollister Thanks for the help and contact. Wasn't too sure if having to cash flow for 6 months was a wise decision or not, but I am more open to it now that you mentioned it. 

Looking at HML in another light from me needing them for finances, from them needing me for the deal is also a great way to view it, as I have as much to offer them as they do to me.

@Rick 

@Rick Santasiere Paying as much as I can into it and using it for quick cash is exactly what I would like to use it for. You still continue to have a mortgage on them though, would you consider removing the mortgage and have the house under a ELOC or LOC? Is this possible, because I haven't found too much info on it, which makes me think it might not be recommended to do so. I feel like it would make things simpler having just a ELOC or LOC instead of also carrying a mortgage (if possible). I might still be confused on this.

@Charlie Nghiem . Sure? Why not? Paying off a 1st lien holder, should have no impact on the 2nd, in fact, they would be happier and feel more secure knowing that they were the only lien. Is it a smart idea? In theory, sure. I would be cautious though over the next 5-10 years. I purposely took a HELOC and converted to a HELO (amortized) so that I could lock into a low rate for fear of the treasury moving in an upward trajectory... Funny, I was wrong, but at some point in time, I will be right. It is the way of the world.. Just be careful with that theory because I could fight both sides of this one. I love the HELOC, as you can see, but it must be used correctly and diligently.

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