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.
Folks, not to enter the debate, but to simply make a statement of fact. The best product someone could use to payoff their mortgage the fastest, while still having the ability to function their everyday life, is a 1st Lien Heloc. Its not magic, its simply math. The only way someone can truly press 100% of their "overage" of monthly income into a mortgage, is if they can also access it back when they need it. Further, a Heloc earns interest on a Simple Interest basis on average daily balance through the month in contrast to a traditional mortgage that earns its interest on a straight line method 30 days in area's on the outstanding principle balance. So, if they push 100% of their payroll to the heloc, only drawing back what they need to pay other bills twice a month, the loan earns less interest, automatically pays the payment, and by default every other dollars goes to principle. I have been in financing for 35 years and am living proof of what I am stating, plus have coached and assisted folks all over the country on the concept, to the tune of several billion dollars of loans.
Roger
Great thread everyone... @Roger Williams, can you provide a list of banks that are "on board" with this strategy? I don't feel like I need to spend $3,500 for a list from RPM or others.
@Kevin Prince I looked into this a while back and found my local credit union provides the loan program. I would like to have another list of lenders as well so thank you for asking the question.
Here's the link to Campus Federal. It's the one I was considering, but I still need to do the numbers.
https://www.campusfederal.org/products/home-loans/
Beth Page is another credit union that is willing to do a 1st lien HELOC. Their rates are posted toward the bottom of the link below:
https://www.bethpagefcu.com/ra...
I don't have a 1st lien HELOC, so I'm also interested in learning which banks or credit unions are open to this approach
Sorry just replying. but both of the credit unions mentioned are good ones. There are plenty of banks that do them all over as well, its more of a matter of if they do them right. Meaning, for it to function properly the Heloc needs to have a checking account with an auto sweep to the Heloc as well as the reverse, when the checking calls for funds it can reach out to the Heloc for coverage. There should also be a debit card tied to the zero balance checking account that can be used in normal fashion for ATM's etc. Thats really the difference of who you want to do business with for the loan. a lot of banks and credit unions can do them, but not that many can provide the proper lined features at no charge to the borrower and even worse if they sell their loans to a third party servicer.
Roger
I agree with using a HELOC to pay down your mortgage faster, but disagree with using a 1st position HELOC. It exposes your entire mortgage to a higher, variable rate and HELOCs can also be frozen. The alternative is to take out a smaller 2nd position HELOC and take a "chunk" of the money and pay it toward your 30 year fixed. Then you essentially treat the HELOC like a checking account - bills out, income in - until you have paid it down and then you repeat the process. It achieves the same result without the instability I mentioned above. Plus, you don't have to bend over backward to find someone who will give you a 1st position HELOC, you can get a 2nd position with relative ease.
@Joshua Silver in what event would they freeze a 1st position HELOC? 2nd position is far more likely to be frozen.
Do you by any chance invest in properties in the north east? Interested to know how much you pay property management companies for covering escrow services etc. Also, are AIO loans typically only available for non-investment properties?
HI Robert I do not have properties in the North east currently only west coast. However from a lending point of view we've had some requests from some CT, VA, GA, NC, investors so we're actively consider licensure in these areas. Hope things are going well on your deals.
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."
Most HELOC's are based off prime and these are consumer based products (rate determined by margin which is fixed + prime).
However the commercial departments in many of these banks or credit unions offer fixed lines on their commercial interest only products that can be based off different indexes like CMT (contact maturity treasury), SOFR (secured overnight financing rate), or other indexes that are less volatile than the prime which is directly linked to the fed funds rate + 3.00%.
This is why the fed funds is at .50% right now and our prime is currently 3.50%.
Just make sure to pick a product and index that works with your overall strategy because in between deals you'll be carrying the "equity," you used to buy a property on this line most likely. You'll probably also be carrying the rehab cost on this line too till you eventually refinance and have that opportunity to pay down this line (to rinse and repeat the BRRR process again).
Regarding the above strategy, I also pay down the line from all sources (rents, other income, earned job income, or anything extra) in order to keep the daily cost of interest lower. This effectively utilizes all dollars to be "put to work," versus having them sit inside the checking account earning .05% annualized. With today's inflation going to 8.5% officially (18-20% per shadowstats.com) we have make sure we're not behind the curve.
Sorry just replying. but both of the credit unions mentioned are good ones. There are plenty of banks that do them all over as well, its more of a matter of if they do them right. Meaning, for it to function properly the Heloc needs to have a checking account with an auto sweep to the Heloc as well as the reverse, when the checking calls for funds it can reach out to the Heloc for coverage. There should also be a debit card tied to the zero balance checking account that can be used in normal fashion for ATM's etc. Thats really the difference of who you want to do business with for the loan. a lot of banks and credit unions can do them, but not that many can provide the proper lined features at no charge to the borrower and even worse if they sell their loans to a third party servicer.
Roger
We offer this product the "auto sweep," checking accoung and when the credit facility is funded (1st position HELOC/line) the borrower receives a checking account # for the sweet account and a loan # for the line. The auto sweep checking account at 12am sweeps over all balances and reduces the daily interest cost on the line based on a /365 day calculation.
Most HELOC"s ive found calculate interest on the average daily balance where the balance used to calculate interest was averaged over /30 or /31 days then multipled by rate/12 so this is not a true daily calculation.
The other issue I've come up with is that we need a quick way to get the fudns to pay down the line and ACH transfers take 3-5 days sometimes so having an autosweep account that engages auto sweep daily really helps plus we dont have to do the manual transfer (micro manage your line pay downs).
@Albert Bui
Hi Albert. I used a 1st lien HELOC to pay off a duplex, now that I have like $5k left, I applied for a construction loan but I was denied cause my DTI is too high. They said that my access to my HELOC ($350k) is the problem. So they want me to close it. But that's how I want to get the down-payment to invest.
How can I get arround that?
Thank you.
@Albert Bui
Hi Albert. I used a 1st lien HELOC to pay off a duplex, now that I have like $5k left, I applied for a construction loan but I was denied cause my DTI is too high. They said that my access to my HELOC ($350k) is the problem. So they want me to close it. But that's how I want to get the down-payment to invest.
How can I get arround that?
Thank you.
sounds like they're asking you for a catch-22 situation / chicken or the egg scenario where one is needed for the other. I would zoom out and look at what you want to achieve first and break things down to a first principles thinking similar to a tesla methodology but with respect to finance and the least costly of capital and balance it with your time frame for expediency.
If you still have questions let me know we'll brain storm.
Best of Luck,
What bank/credit union did you use?
Hi @Troy Lott. We offer the first lien HELOC, it is NOT tied to the prime rate, feel free to DM me.
I have been meaning to talk to someone about the topic and would like to apply for one as I am in process of purchasing a property. Can you help me with the list of banks that can do this
I used this on my first house with my local credit union after discovering the strategy through Replace Your Mortgage, now Replace Your University. I know the Kwak Brothers speak about this frequently as well, I've found a few websites that promote it or speak about it as well. The Replace Your Mortgage team has a list of banks and credit unions they prefer working with for their members. The reality is there's nothing stopping you from doing this with any bank or CU except the institution itself, mostly because they simply don't know or don't understand, or they don't offer the product in your area. I recently found first savings bank in Tennessee that promotes this specific product Roger Williams is the contact, not sure if there is any affiliation to the Roger Williams on this thread. The simplest products will offer automatic sweep, my previous institution didn't offer sweep but did offer overdraft from the HELOC so I didn't have to manage account transfers. At worst you'll have to schedule monthly transfers to cover your recurring income and expenses as they won't offer sweep or overdraft protection. I created a spreadsheet a while back that tracks rate changes historically as well as the rate predictions for the next ~12 months. Also pulls a list of credit unions and banks for each state from federal databases. I've also used and modified a HELOC calculator spreadsheet from Vertex 42 that is quite useful in gauging this strategy with your situation. He has a number of other useful calculators as well.