I'm looking at a property that would require 200k downpayment + closing costs. This would dramatically deplete my liquid assets. I was thinking of getting a Home equity loan (HEL) or a HELOC on my primary residence which has just enough equity to pay the downpayment.
1) I've never taken out home equity before, and wanted to know how I chose between HEL (5,10, 20yr) or HELOC (10yr draw). One local bank said the HEL would have a fixed rate of 6.25% while the HELOC (80% LTV) is currently at 4.75% if i open a bank account.
2) In addition, I've seen recent posts of people finding HELOC with significantly lower rates (3%) and higher LTV (95%). I've called several local banks, and none of them come close. Is it completely dependent on location? I am in NYC.
3) What happens in interest rates skyrocket and I am on a HELOC? Are there some borrowing tricks down the road (like taking out another mortgage) that I can apply to protect myself from this?
4) Or should I just deplete the liquid assets I have.
I imagine the decision is going to be dependent on how interest rates change over the next 10yrs, but wanted to know if anyone has any suggestions on what they've done recently in similar situations.
When using a HELOC or HEL, I would look at my future goals and finding a way to pay it off as quickly as possible, as well as having an escape strategy. Its not something you want lingering around. Who knows where the rate is going to be in a couple years. I know plenty of people stuck with a hefty payment 10 years later because they didn't utilize it correctly.
Personally, I would never use a HELOC or HEL for a down payment unless I could fix up the place and refinance to pay back the money borrowed. Or at least a good chunk of it.
I just used my heloc for a down payment. I will refi asap to lock something in and mitigate risk. As the previous poster mentioned it is not wise to have your primary residence leveraged long term with an adjustable rate loan. So, I'd go for it just be cautious.
do you mean refinancing the HELOC and the first mortgage into a new primary mortgage?
It sounds like with HELOC (to pay for property 2), it's best to pay it off as soon as possible (1-3yrs). If you cannot pay it off, then consolidate it with the remaining balance of the property you took the equity out of (property 1) into a new mortgage. If I move into property 2 and it becomes my primary, and i convert property 1 to a rental, then the new mortgage on property 1 will get an interest rate based on a rental. In this scenario, it wouldn't make sense to get a HELOC unless I pay the 200k back promptly.
If I want to pay the 200k back over a long period of time, an HEL sounds like the better choice, though the interest rate is higher 6.25% 20yr. I could try paying it back sooner, maybe 5 or 10 years, but this would significantly cut into cash flow. Additional thoughts?
I took out a Heloc on a primary residence that eventually became a rental. Then bought another primary and refinanced my new primary, rolling the Heloc from the (now) rental into my primary, thus paying very low interest for it.
You also have to consider it usually takes at least 30 days to close on a HELOC or HE Loan. It will also change how your credit report looks. A HELOC balance has the payment based on a 10-year amoritization. Which can make your monthly payment huge and potentially tank your DTI ratio. Ask me how I know that, lol.
@Darrick Lowe It really depends on your goal here. Even if you pull money out of HELOC, can you pay it back in less than 5-10 years?
I used HELOC out of my primary residence as a down payment for my rental property.
I had a spreadsheet and planned to pay it off within 4 years. So far it's been on track. And I even beat the goal by half now. (i put my bonuses from my day job to it).
The HELOC rates kept increasing almost every quarter and that scared me.
Part of the reason I was able to pay quickly - between me and my wife, we opened 3 Balance transfer credit cards with 0% interest and $0 transfer fee.
I transferred my HELOC balances to the credit cards and paid no interest in the last 15 months or so - and I plan to keep bouncing them between cards until its paid off.
This method really plunged my credit score though. I went from 800s to 500s.. in a matter of days. lol
But as long as I dont plan to pull more loans, I'll be fine.
Now, my credit score is back up to 700s..because I have paid most of the balances.
Disclaimer: I dont suggest anyone doing the same way as I did.