Developer · New York, NY · Member since 2016 · 50 posts · 7 votes
What does the BP community think about 1st lien HELOCs as a way to free up equity in your primary home for investment purposes? If anyone has gone through the process, can you give any advice as to whether you recommend the strategy or if it is not worth it?
HELOCs usually have a 10 year draw period interest only before amortizing out.
If you have a 1st lien HELOC, what happens to escrow for taxes and insurance, can it be waived and paid out of your own pocket or is it tied up into the monthly payment?
With regards to recourse vs. non-recourse loans, would putting the HELOC in 1st position allow a bank to come after personal assets in the event of a default?
Are there any banks/credit unions that charge LIBOR instead of Prime on HELOCs?
@Roberto Westerband on the investment property I will pull a standard commercial loan and have the property stand alone. At that point my current HELOC will be free to be used on the next property and I will rinse and repeat, so "yes" this is a financing variation of BRRR.
@Christopher Winkler I live in the SF Bay Area so I have had a great run of appreciation over the past 13 years of ownership, almost 3x to be exact. I had also been building a relationship up with my lender over the past half decade, so they allowed me to add the value of a second property to my HELOC. There is nothing tying the loan to that property, everything is against my primary residence. My total debt to value on my primary is still less than 30%. I kept the monthly payments the same from my original 30 year fixed to the HELOC, but the pay down rate is substantially higher with my new loan. In my case, on all of my properties, appreciation is the "steak and all of the sides" of my investments and the cash flow is the Merlot that goes with the meal. I do not go after properties that cannot support both sides of the equation: appreciation + cash flow = wealth.
I really like the idea of using a HELOC because it is essentially a giant credit card. No more rushing and fighting for a loan during the purchase phase of a property. I now have the luxury of shopping a commercial loan at my own pace. It also allowed me to act as a "cash buyer" when I went after the 6 plex and it will do so into the future.
The obvious key to this strategy is that you have to be able to buildup to a large enough HELOC. This is not a "get rich quick" strategy. It literally took me years to get all of the pieces into place, but now I have a huge amount of freedom and flexibility.
@Roberto Westerband from my experience with my own HELOC (my home is paid up when I got the HELOC), taxes and insurance had nothing to do with my using the $$$. They did however put themselves as the lien holder on record for both insurance and taxes (as noted when I look at my records). We still pay insurance and taxes out of pocket.
I can't answer your question about personal assets but I assume that like with anything regarding a loan, if it's in default you could potentially be subject to the lender going after personal assets.
When I was looking for my HELOC, all the lenders dealt with Prime and I talked to a lot both local and big banks. I went with my local for a better CS and hands-on of my account(s).
@Roberto Westerband Maybe it's terminology but I'm not sure I understand completely when you say 1st lien HELOC. Because my home if paid and I got the HELOC I know they are 1st. Is that what you mean? So for instance, there is an existing note and you want to do a HELOC based on their criteria 75% LTV and you get it but because there is already an existing 1st mortgage (lien), the HELOC would be 2nd? Is that correct?
@Daria B. when I say 1st lien HELOC I mean I have a current mortgage and I want to refinance it as a HELOC. So the HELOC would hold 1st position on the owner occupied property (if this was possible for non-owner occupied properties, even better). Now, I don't know if that 1st position would be in the form of a note or a UCC, but either way it would be secured by the property as collateral.
"refinance it as a HELOC"...never heard of doing it that way but that doesn't mean it can't be done. Essentially, what I'm hearing is you are wanting to take a HELOC for the value remaining that is allowed to be taken and pay off the existing note. I still think if you were allowed to do that, the taxes and insurance would be out of pocket. The HELOC is not the same as a conventional loan so they don't have anything like mandatory escrow accounts.
When you say non-owner occupied, if you can get a HELOC on investment property, and I know Regions Bank does this because I went through them to get mine and found they will do a HELOC on investment properties, then you would be paying the investment off with the equity via a HELOC.
Into a HELOC in December. Ours is based on the 1 month LIBOR and has a draw period of 20 years.
We do not have an escrow account so we are responsible for making sure we pay insurance and taxes.
We will be buying a rental within the next two months using the HELOC.
There are a ton of different products out there but this worked for us. PM if you'd like more info.
As far as our experience, I think it is a great strategy! We put all of our income into the HELOC which reduces the interest we pay. Then we pay our bills out of it. The leftover stays and reduces the principal balance. We could pay the HELOC off in 3 years this way but we plan to invest instead.
@Roberto Westerband I did it last year. I pulled a 1st position HELOC on my primary at prime minus 1%. It paid off the existing loan and left me enough money to fully fund the purchase of a 6 plex in Oakland Ca. The rents from the acquired building allow me to pay down the HELOC at an accelerated pace. I plan to refi the property after a 12 month seasoning period and put the money back into the HELOCI, essentially re-loading my gun to go hunting again.
@Chris Wilson It's good to hear this is a viable option. Did you have to negotiate with the bank/credit union to get LIBOR?
@Arlen Chou will you be doing the same with the investment property (i.e. refinance as a 1st position HELOC)? Just wondering if you can somehow combine this strategy with the BRRR strategy
@Roberto Westerband on the investment property I will pull a standard commercial loan and have the property stand alone. At that point my current HELOC will be free to be used on the next property and I will rinse and repeat, so "yes" this is a financing variation of BRRR.
@Christopher Winkler I live in the SF Bay Area so I have had a great run of appreciation over the past 13 years of ownership, almost 3x to be exact. I had also been building a relationship up with my lender over the past half decade, so they allowed me to add the value of a second property to my HELOC. There is nothing tying the loan to that property, everything is against my primary residence. My total debt to value on my primary is still less than 30%. I kept the monthly payments the same from my original 30 year fixed to the HELOC, but the pay down rate is substantially higher with my new loan. In my case, on all of my properties, appreciation is the "steak and all of the sides" of my investments and the cash flow is the Merlot that goes with the meal. I do not go after properties that cannot support both sides of the equation: appreciation + cash flow = wealth.
I really like the idea of using a HELOC because it is essentially a giant credit card. No more rushing and fighting for a loan during the purchase phase of a property. I now have the luxury of shopping a commercial loan at my own pace. It also allowed me to act as a "cash buyer" when I went after the 6 plex and it will do so into the future.
The obvious key to this strategy is that you have to be able to buildup to a large enough HELOC. This is not a "get rich quick" strategy. It literally took me years to get all of the pieces into place, but now I have a huge amount of freedom and flexibility.
Into a HELOC in December. Ours is based on the 1 month LIBOR and has a draw period of 20 years.
We do not have an escrow account so we are responsible for making sure we pay insurance and taxes.
We will be buying a rental within the next two months using the HELOC.
There are a ton of different products out there but this worked for us. PM if you'd like more info.
Can you explain how you were able to get a HELOC based on LIBOR, and was that a better choice than the usual "Prime rate".
I have not been able to find a good definition of difference between Prime (which is what my HELOC is based upon) and LIBOR that lenders use. This definition eludes to "banks" using this between themselves versus a consumer being able to get these rates.
"Libor is used by banks – it is the interest rate at which banks lend to each other in certain London money markets. (Borrowers, lenders, and investors may use Libor as a reference rate.) US Prime Rate is used by consumers – it is the rate at which banks lend to their best customers."
I found one bank that uses LIBOR as the index for the HELOC. No negotiation. It's just how the product is configured.
The LIBOR historically has been lower than prime rate but the bank adds a spread to come up with your interest rate. i.e. LIBOR 0.5 + Spread 3.5= interest rate 4.0. The idea is that the variable interest rate will remain lower than if it was based on prime rate.
We chose this product because it had a lower cap for the max interest rate and a longer draw period than other HELOCS we found.
@Chris Wilson im purchasing a home and want to get in with a first position HELOC so i can build equity quickly to use for investment properties. Im very interested in finding an institution that calculates its rate basedon libor. Are you willing to share that info?
I'm a first time homeowner and just purchased my condo one year ago. I haven't built much equity in it in just one year but I considering replacing my current mortgage with a first lien heloc. One of my local banks is offering a 90% LTV heloc and this would pay off my mortgage balance just short of only about 5k which I would pay myself. My current mortgage rate is 4% and the heloc has a promo rate of 1.75% for two years. Instead of paying just the minimum on the heloc, I would continue the same monthly payments I was paying on the mortgage but theyd be way over the minimum and the excess would be applied to principal and would accelerate me in paying off my apartment. After the promo period I would just go to another bank offering the same promos. This was my understanding of the strategy and I'm really new to this. Am I missing how this can be leveraged to increase equity to buy rental property?? Could someone explain? I apologize in advance for asking what is probably a very basic question.
So the heloc plus the 5k would pay off my entire mortgage balance. I'd then be paying my heloc off at 1.75% simple interest rather than the original mortgage loan with 4% compounded interest. I'd be able to pay it off faster than my original loan, wouldn't that mean I'm building equity faster?
In general, Leslie, paying down your mortgage faster builds equity faster. Coupled with the possibility of appreciation, you could build equity very quickly. What is the average yearly appreciation of your property and neighborhood? If you project out how quickly your equity will increase, you can get a decent idea of how to leverage your resources. I usually use have the yearly appreciation as an estimate of growth.
So the heloc plus the 5k would pay off my entire mortgage balance. I'd then be paying my heloc off at 1.75% simple interest rather than the original mortgage loan with 4% compounded interest. I'd be able to pay it off faster than my original loan, wouldn't that mean I'm building equity faster?
My main concern is that you may have paid "too much" for your condo to begin with? As far as I know, Hawaii is still going gangbusters, so any property bought a year ago should already have gained you 10% equity, on top of your 3.5% down. [ie. Their $5k fee could be a set up].
Your plan is a variation of Credit Card hopping - transferring ones balance every year into a new trial period Interest-free Card. But statistically, how many actually CHANGE their lifestyle so that they actually pay off those Credit Card/s? And how many of them NEVER pay interest?
And when the merry-go-round stops, which Institution will you be STUCK with, once their REAL interest rates kick in? [Biggerpockets plan is: Buy BETTER, from day one!] Good luck...
I just did the Heloc strategy too,last month, for my condo with 3 yrs left on my 1st mortgage. I didn't want to go overboard so was ultra conservative on leveraging my equity which I might regret if a killer deal presents itself. But since I don't live by regrets, I'm just glad to be in a position to have a comfortable heloc bank for my first REI property. With a 0.65 (1st yr) & 3.5 (2-5 yrs) rate I can accelerate payments to stay ahead of the game. At least that's what the plan is.
@Les Leslie how do I find out what the avg yearly appreciation is?
@Brent Coombs how would I know if I paid too much? When I got the appraisal during closing, it appraised for a little higher than what I had offered so I was feeling pretty secure about the purchase. Yes I agree the strategy relies on these promo rates, similar to credit card hopping, but I'm not gonna become lax in my lifestyle/budget or reduce my payments to the minimum interest owed, I'm still going to pay the same amount per month I was paying previously but the payment will go a lot farther in terms of making a dent in the principal. Do I really need to worry about being stuck with a bank? Couldn't I always refinance?
@Lorna Kaaloa what do you mean you were ultra conservative? Are you just accelating your payments or are you planning to buy rental property as well?
Thanks everyone, I really appreciate bouncing these thoughts off you!