So, there are obviously a swarm of different lending companies out there, all of which seem to have varying points, terms, and interest rates. As I have been exploring private lending, hard money, and conventional loans there are advantages and disadvantages to each, but it wasn't until I was opening my mail today that I had a different idea. While I'm sure this isn't a new idea, a balance transfer deal on a credit card I don't currently use often had a low "transfer fee."
I'm thinking the single transfer fee and full access to the funds without an escrow make less work for me.
Has anyone run into any issues with using a balance transfer for helping to finance a rehab?
Basically the terms are 2% transfer fee (equivalent to points I suppose) and 0% APR for 18 months and I just make minimum payments. This sounds like a world better than paying 2-5 points plus interest using any of the other methods. The limit is only the credit limit I suppose and the elevated APR if its not paid off (but 18 months is substantially longer than hard money), but I'm curious if anyone has run into problems or if this is a good strategy for a low cost mini-loan.
Bank of America has a free balance transfer + 0% 18MO card running atm. I'm currently floating a free $20k which I applied to my line of equity to save me 5% APR on that $20k.
In the first year of our flipping business, we implemented this strategy and had about 10 different business credits. Each of them with a limit between $3,000 and $18,000. Over time, keeping track of all of these cards really sucked, especially the ones with small credit limits. A couple of cards didn't get fully paid off by the time the 0% promo was over, so we were charged the full interest for those. We also had late payments on a couple as well, and that both negated the promo and raised our rate up to 28%.
Good thing this was all business credit and didn't affect our personal credit. Be careful about not maxing them out because that hurts your credit. And potentially your DTI, if you ever needed to get a residential loan for some reason.
But if you only have a couple, that's pretty manageable and helps you get rewards too.
How would you finance the purchase of the property though?
It's a good strategy if you are very disciplined in managing the card(s). Not only are you avoiding the interest of a Hard Money loan, you are also avoiding other closing costs such as admin fees, etc. If it looks like you might run out of promo time, you need to look at replacing the debt with other card(s) in a timely manner. As Nghi stated, you can completely hurt your cause if you miss the deadline. If you are buying the house with a traditional mortgage and using the credit card as rehab only, be sure to wait and do the balance transfer after you close so you don't screw up your first lien underwriting. Good Luck!
@Eric Chappell one thing you didn't mention is if you were "buying and holding" or if you were "flipping". If you are flipping your strategy is right on. Many flippers use this strategy and many use a HELOC to fund their deals...which is essentially a very large credit card. As long as you are paying back those cards quickly there is very little downside to this strategy....again, as long as you are flipping. Lots of investors use it. Thanks!
@Waylon Themer Thank you for the advice regarding the effects of using the transfer and the mortgage/closing timing. I was hoping to use this method for Buy and Hold opportunities on homes that did need some rehab and then refinancing. Unless the home needs very little rehab, I doubt a conventional loan would be approved for the homes I'm looking to buy. I was hoping to use private/Hard Money for the purchase and then the credit for the rehab. The whole balance transfer was a thought just to limit the amout I would have to borrow using hard money etc. I'm not sure what the transfer balance would do to the potential refinance after the rehab.
@Andrew Postell I do have a line of credit also, but if it was being held for a longer period, the balance transfer fee would win out ultimately over the LOC rate. If I buy and hold, I'm hoping 18 months will be plenty of time to rehab and refinance.
Assuming the balance transfer doesn't affect my debt to income too much, what potential implications would this have on the refinance? Higher interest rate?
I have used this strategy for my buy and hold properties and I talk about it a little bit in my podcast (link below in my signature).
As far as I am concerned, it is some of the cheapest financing available, but, as @Nghi Le mentioned, if you are not VERY careful, it will not work and will become some of the most expensive financing you'll ever have.
My mortgage seasoning time was 6 months, so I was able to refi at 6 months, even though my payoff was between 12 and 24months, depending on the card.
I then did some very careful cash flow analysis, took my refi money and bought another house with it instead of paying off the credit cards. Why? Because the cash flow I was getting from the rental was enough to pay off the credit cards, so I just used the tenant's money to pay off the credit cards, taking the full term length to do so on each card. However, after the refi, I did not just make the minimum payments on the cards. I took the balance, divided it by the remaining payments and made that payment amount every month. Making only the minimums means a balloon payment at the end is really tough to make if something goes wrong.
If I'd had a problem with the tenants, I had a Plan B in mind for getting those cards paid off, so make sure you do too, particularly if the Refi appraisal is not as high as you think it is or you have some other snafu that could make this more complicated.
@Eric Chappell you mentioned some very important items in your last post. One, conventional loans do have a rehab loan available. Even if the property is challenged you can receive a rehab loan with a 30 year fixed rate from conventional financing. Not every bank offers this loan type though. So you may have to ask around.
As was mentioned in the post directly above this one, refinancing is different than flipping. It doesn't mean that you can't do what you plan but it would mean one important item - you can only refinance 75% of the value of the property. When you refinance, you can refinance up to 85% of the value of the property. This is important since you are essentially buying the home with cash...thus no lien for the bank to refinance. So you will be subject to cash out refinancing rules.
The other item to understand is that your "Debt to Income" ratio is a "yes" or "no" decision. Meaning either you can be approved or not approved. It doesn't have any affect on the rate but it could jeopardize your ability to refinance.
I would strongly recommend to be preapproved, knowing your credit card minimum payments, to make sure that your plan will work.
Feel free to ask more questions if needed. Thanks!
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