First Lien HELOC Strategy
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.
@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.
I present you the following posts (within this thread) where you have not been just "tempering those assertions":
1) Jane posted that she was interested in paying down her mortgage balance faster using the strategy. You jumped in and advised that she should also be looking at using the HELOC for future investments instead of just to pay down the balance. Great, no problems up until this point. She then says she can't seem to get a HELOC for over $50K to which you said:
In reality, her problem may have just been that she was trying to get a second position mortgage, rather than a first position. But instead, you proceeded to try and re-direct her away from the strategy. Not because you've analyzed her situation or her options, but because you were saying "extra principal only payments will yield similar results." See how you fall into example 1 of my previous post?
2) David seemed to have a grasp of the strategy, but was thinking of going on a roundabout way of getting the first position HELOC. You immediately got on his case and said:
Do you know what interest rates he could get on a HELOC? Or what his future plans are? Maybe he wants to start looking for a rental and getting approved for the HELOC would help him do that while dumping in his savings to benefit from a lower daily balance than he would have with the mortgage.
Bottom line, to make a determination on what is best for people, you have to take in all the factors and you are jumping to conclusions way too fast based on your tunnel vision that low interest mortgage > variable first lien HELOC.
I present you the following posts (within this thread) where you have not been just "tempering those assertions":
1) Jane posted that she was interested in paying down her mortgage balance faster using the strategy. You jumped in and advised that she should also be looking at using the HELOC for future investments instead of just to pay down the balance. Great, no problems up until this point. She then says she can't seem to get a HELOC for over $50K to which you said:
In reality, her problem may have just been that she was trying to get a second position mortgage, rather than a first position. But instead, you proceeded to try and re-direct her away from the strategy. Not because you've analyzed her situation or her options, but because you were saying "extra principal only payments will yield similar results." See how you fall into example 1 of my previous post?
2) David seemed to have a grasp of the strategy, but was thinking of going on a roundabout way of getting the first position HELOC. You immediately got on his case and said:
Do you know what interest rates he could get on a HELOC? Or what his future plans are? Maybe he wants to start looking for a rental and getting approved for the HELOC would help him do that while dumping in his savings to benefit from a lower daily balance than he would have with the mortgage.
Bottom line, to make a determination on what is best for people, you have to take in all the factors and you are jumping to conclusions way too fast based on your tunnel vision that low interest mortgage > variable first lien HELOC.
If so, then: so are you! eg. You seem to be saying that my suggestion to Jane would not help her achieve her pay-off-my-mortgage-early goal? (Without proving that your way is better?) [Them's fighting words!]
But as I already indicated, neither your or my opinions harm the debate.
Im having trouble finding banks to do this . Are there any that are better than others?
Sometimes the banks won't understand your intent and assume you mean second position rather than first and then tell you that you can't get a HELOC for the amount you want. Do you have a decent amount of equity in your property?
Then you should have no problem converting it to a first position HELOC. You could also ask what their terms are regarding LTV and things like that to nail down the reason they are saying you cannot get a first position HELOC. Additionally you would most likely need to qualify using a higher rate than the HELOC would initially start off at since it is variable and they want to be conservative. If neither of these two items are an issue then I can't see why they wouldn't let you do it.
Is there a program / bank that will originate a loan as a First Lien HELOC upon purchase of a primary residence or does it have to be a refi? I have a property under contract that will be my primary residence and I'd like to use this method ASAP. I have 20% down payment available. Using cash flow to pay down the principle but still having access to the funds to invest in other properties/investments seems like the holy grail to me.
Is there a program / bank that will originate a loan as a First Lien HELOC upon purchase of a primary residence or does it have to be a refi? I have a property under contract that will be my primary residence and I'd like to use this method ASAP. I have 20% down payment available. Using cash flow to pay down the principle but still having access to the funds to invest in other properties/investments seems like the holy grail to me.
Not to my knowledge, although you would think it wouldn’t matter to the bank. One specific branch was doing it in Hawaii for a short period of time, but then they stopped.
One way to get around this is to find some way to come up with enough money to finalize the sale through cash (e.g. - borrow money) and then just refi that money out via the HELOC to repay that debt. One extra hoop to jump through but it puts you in the same place. You just want to be sure you qualify for the HELOC and what the terms will be prior to doing so. Hope that helps.
Is there a program / bank that will originate a loan as a First Lien HELOC upon purchase of a primary residence or does it have to be a refi? I have a property under contract that will be my primary residence and I'd like to use this method ASAP. I have 20% down payment available. Using cash flow to pay down the principle but still having access to the funds to invest in other properties/investments seems like the holy grail to me.
Not to my knowledge, although you would think it wouldn’t matter to the bank. One specific branch was doing it in Hawaii for a short period of time, but then they stopped.
One way to get around this is to find some way to come up with enough money to finalize the sale through cash (e.g. - borrow money) and then just refi that money out via the HELOC to repay that debt. One extra hoop to jump through but it puts you in the same place. You just want to be sure you qualify for the HELOC and what the terms will be prior to doing so. Hope that helps.
Thanks Nick! Do most banks want a "seasoning period" before they'll do a HELOC?
Is there a program / bank that will originate a loan as a First Lien HELOC upon purchase of a primary residence or does it have to be a refi? I have a property under contract that will be my primary residence and I'd like to use this method ASAP. I have 20% down payment available. Using cash flow to pay down the principle but still having access to the funds to invest in other properties/investments seems like the holy grail to me.
Not to my knowledge, although you would think it wouldn’t matter to the bank. One specific branch was doing it in Hawaii for a short period of time, but then they stopped.
One way to get around this is to find some way to come up with enough money to finalize the sale through cash (e.g. - borrow money) and then just refi that money out via the HELOC to repay that debt. One extra hoop to jump through but it puts you in the same place. You just want to be sure you qualify for the HELOC and what the terms will be prior to doing so. Hope that helps.
Thanks Nick! Do most banks want a "seasoning period" before they'll do a HELOC?
No problem. If you did the cash to HELOC workaround you wouldn't have to worry about a seasoning period (I don't think) since you wouldn't involve the bank until after closing on the property (which you would then own free and clear). In my experience the only hold up was the delay in getting my name tied to the property in the state records.
Hello, new here and read as much as a can without my brain melting LOL. I was wondering if someone could easily help me with my idea of converting the mortgage to a HELOC here are my details
Home Value 260k
Balance 199k
Credit Union is offering me 208k HELOC at 4.5% 20 years.
Monthly income after taxes $3800
Monthly expenses not including mortgage or HELOC $ 3500
We are wanting to use the HELOC to pay off some credit cards and a car, thus reducing our monthly expenses by almost 1000 a month. we would be down to about $ 2600 in expenses. The idea for us ( and help if we are wrong ), We would take out the 8K in Equity from HELOC ( as our credit union told us that is all that would be available right away since we are converting to a heloc). to use that 8k the first month, reduce our debts from 3500$ to 3200$, while placing about $3800 a month into the HELOC. we love to use the HELOC as our checking accoutn but need to know it is possible for us given our income and monthly expenses. we dont want to sell the home because we are unable to Purchase a home do to a chapter7 recently. but we have a cosigner for our HEloc with over 800 CS and steady 60k a year income.
Our questions are:
1. Having a chapter7 and an excellent cosigner.. do we have fairly good odds of getting the HELOC????
2. How can we reduce our debts from 3500$ a month to about 2500$ while paying our Heloc 3800$ a month? I thought at first converting it over would give us 208K , not 8K, sorry for the confusion that is why we need help in direction. we love to pay off as much debt 60K worth in the first tens year of the HELOC, then reapply for it again and if not pay the last tens years i guess.
PS - we cant not bring in more income at the time, 3 kids under 5 i work full time and so does my wife.
@Chris Ray, so it seems that rather than "Credit Union is offering me $208k HELOC at 4.5% 20 years", you're saying: "Credit Union hasn't really offered me $208k HELOC at 4.5% 20 years"?
I'm curious: why is your co-signer prepared to take on your risk with you? Is it because they will become a 50% (or other predetermined %) equity owner if and when it all goes pear-shaped for you (again)?
Am I correct in understanding that currently you must be going backwards fast, seeing as you only have $300/m play money, which is supposed to cover your $199k mortgage? ie. How much are your monthly expenses, with your mortgage repayments included?
Does your co-signer think they won't have to pay anything monthly out of their own income? [If that's not the case, then surely their income should be included in your stated monthly available income?]
Welcome to BP. All the best...
We are waiting for the application response.. either yes or no.. That was my first question here is with my BK7 but with a really good cosigner would they approve me?
If they dont then we may have the cosigner just do the HELOC themselves without me on it and we pay them.
The cosigner is on board with me because they see how this could help us, ( family member ), they have seen every penny we have cut out and what is left and how a heloc over the mortgage would save us money, and paying the home off faster at the sametime.
@Chris Ray, if your co-signer pays out your mortgage (etc.) for you, so that you start paying them instead of your current lenders, will that (by itself) really help you pay off your debt/s quicker?
Do you get what I mean?
ie. If you can afford to pay your debt/s off quicker, what's stopping you now?
[Nonetheless, in principal, I agree with swapping out high interest loans for low interest ones].
Q. What is your current mortgage Interest Rate? To be paid out over how many years?...
Lets say you have a 100% winning court case. Its a no brainer that you are right and the other party is wrong, yet, you still higher an attorney to represent you. Why? Remember its 100%.
Because the system is not in your favor (much like loans/ banking) and there are plenty of things that you are not thinking of nor are equipped to deal with as situations arise, so you pay a professional.
I use this example because of my success and gratitude for having the professionals help me through the HELOC strategy. Yes, my wife and I paid a group and they taught us far more than "Put all your money in". We are about 2yrs in to our loan (at a 1% higher interest rate than the mortgage I gave up) and about 2 1/2- 3 yrs left to be debt free and saved over $10,000 last year alone in interest costs.
Do not get stuck in "Analysis Paralysis"
If you keep saying " I just don't see how______________________" pay for the help.
If you are cash flow positive, there is an excellent chance you have better options.
"If you are cash flow positive"...
@Chris Ray, if your co-signer pays out your mortgage (etc.) for you, so that you start paying them instead of your current lenders, will that (by itself) really help you pay off your debt/s quicker?
Do you get what I mean?
ie. If you can afford to pay your debt/s off quicker, what's stopping you now?
[Nonetheless, in principal, I agree with swapping out high interest loans for low interest ones].
Q. What is your current mortgage Interest Rate? To be paid out over how many years?...
We are currently on a 3.75% 30 yr with 25 years left, Currently we can not add more to our debts to pay them off faster, what we can do is use the revolving line of credit from heloc to pay off big chunks of debts thus lowering our totally expense due each month and free up more cashflow, at the sametime as paying off our heloc and other bills, by having the HELOC we can start paying off debt we could not while paying off our home at the sametime.
IE: we currently earn about 4500$ a month, and have 5200$ in bills a month, with the HELOC we can shave that monthly total from 5200$ to about 3000$ by using the heloc right away and putting putting our 4500$ a month in the heloc
Attached an image of our currently bills vs have a 1st position heloc once we have the HELOC we can pay off some major debt, freeing up cashflow while putting 4500$ a month in to the heloc and taking 3000$ out monthly.
@Chris Ray, in your circumstances, I'm not convinced that a HELOC would allow you to "pay off big chunks" quickly. Why? Because your mandatory HELOC repayments (which need to cover principal and interest for $208k that you'd be borrowing) plus all your other expenses won't actually have gone down. ie. You'd still owe each month much the same as you do now.
[See my post above where I told Hampton Woods: ..."If you are cash flow positive", with the emphasis on the "if". ie. Are you cash flow positive?]
My suggestion is: if your co-signer wants to help you out, they could pay off your high interest credit cards / loans out of their cash, and then, only charge you the same interest/terms as you're being charged on your mortgage. Would they do that for you?
And, could you promise them you'd not accumulate interest your credit card/s again?
What do you reckon? Good luck...
Sorry to make a long thread longer, but we too are considering a first position HELOC that we will feed all income and expenses through. From what I have read, most people here are using them to purchase investment properties or for debt consolidation. We don't really have a need for either, but would love to hear your thoughts on using that equity to put in a pool?
I know a pool is a horrible Investment and we will never make any money back from it. I am just curious if it is a horrible idea to use equity to put it in or if we should save up and pay cash in a year or two?
Where I live the pool and landscaping will run me about $130k. We owe $370k on our home with a current market value of $800k. We have no debt other that the $370k on the home.
I would love to hear your thoughts. Thanks!
@Spencer Coles I did that back in 2008. Worst damn money move of my life! That being said, whenever I can pay down a consumer debt on my terms vs the bankers, it’s my preferred method.
@Steve L. Thanks. So what made it such a bad move for you?
@Spencer ColesIn short, the housing market dropped like a rock, I had a +$1.1 million dollar home that had plummeted, two over inflated sfr rentals and a commercial where house. All in California. I had to short sale, but luckily had a rental to move into. I took out a loan for a pool to make me feel better but only ended up with a creepy old lady for a neighbor that would open the shades anytime I’d get in the pool. So all it feels like is that I have a puddle in my back yard since I haven’t used it in years As far monetarily, it hurt my ability to prosper because I took out a loan. Even if I made extra payments, the principal stayed the same. At least with a heloc my interest owed would have reduced. As far as saving for anything cash, I never do that now due to the effect inflation has on cash. Even with a 2% yielding savings account, California inflation in my opinion is way more than 2-3%. I say invest the cash and let your tenants pay the bill and if your tenants can’t pay for it, you can’t afford it yet.
Sorry to make a long thread longer, but we too are considering a first position HELOC that we will feed all income and expenses through. From what I have read, most people here are using them to purchase investment properties or for debt consolidation. We don't really have a need for either, but would love to hear your thoughts on using that equity to put in a pool?
I know a pool is a horrible Investment and we will never make any money back from it. I am just curious if it is a horrible idea to use equity to put it in or if we should save up and pay cash in a year or two?
Where I live the pool and landscaping will run me about $130k. We owe $370k on our home with a current market value of $800k. We have no debt other that the $370k on the home.
I would love to hear your thoughts. Thanks!
As Steve said, it's your money and you should use it however you want. The dollar amount and what you use it for is not so relevant in this discussion, but your question does highlight the options a lot of people face when looking at using the equity they have in their home, thus the amount of people who are drawn to this thread.
One way I've described the first lien HELOC strategy is "instant refinancing" based on how quickly you can access your equity once you obtain the HELOC. The benefit of this relative to a normal refinance is that the traditional route of refinancing prevents you from choosing when you start accruing interest. Imagine you refinance your home to get the funds and then you don't get around to finishing the project until a year later. You just paid a years worth of additional interest compared to someone using a HELOC. This is in addition to the benefit of being able to route all your income/expenses through the HELOC as you mentioned. Based on the numbers you provided, I see no reason why you wouldn't be able to be approved for a first position HELOC. It just comes down to how much you want to add the pool and terms of the HELOC you can obtain.
Robert, I have been in the financing world to include banking for almost 35 years. I just left the role of President of a mortgage division of a bank that I build from the ground up. One of the products I built and still teach people about today is a 1st Lien Heloc and why to use one over their traditional mortgage. So in other words, why to refinance their current fixed rate mortgage into a 1st Lien Heloc. The math is easy, the 1st Lien Heloc, even at a higher interest rate, will out perform a traditional mortgage hands down with respect to gaining equity/wealth much faster, with no change in household spending habits. In other countries, they have been doing this forever and in fact they do not have fixed rate mortgages as we know them to be here in the U.S..
Roger