Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes
Hi everyone,
I purchased my primary resident in Queens, NY about 5 years ago. Thanks to crazy NY Real estate market, I have significant amount of equity on my PR which i'm considering tapping into to invest in other rental properties. I've looked around on past posts as well as google, but I can't seem to find any reason why anyone would choose HEL over HELOC. Let me know if I'm missing anything:
1. HELOC allows you to draw as much as you need (up to limit) when you need it, as opposed to HEL gives you everything at lump sum, whether you need everything or not.
2. HELOC allows you to pay interest only, where as HEL requires P&I like mortgage
3. HELOC are mostly Variable interest rate, but you CAN find fixed interest ones.
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
7y
@Michinori Kaneko HELOCs are great products if you have a good plan to pay it back. They have low costs, you only pay interest when you draw.....but they have adjustable rates AND they "mature" into something else after a while. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. With rates moving higher, it is likely that your rate will increase in the future. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC for 10 years it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.
So if use a HELOC, pay it back, use it again, pay it back...it is PERFECT. That's why flippers LOVE HELOCs and LOCs. But if you aren't planning to pay it back please be very, very careful. Maybe a cash out loan might be more appropriate.
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
7y
@Michinori Kaneko HELOCs are great products if you have a good plan to pay it back. They have low costs, you only pay interest when you draw.....but they have adjustable rates AND they "mature" into something else after a while. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. With rates moving higher, it is likely that your rate will increase in the future. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC for 10 years it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.
So if use a HELOC, pay it back, use it again, pay it back...it is PERFECT. That's why flippers LOVE HELOCs and LOCs. But if you aren't planning to pay it back please be very, very careful. Maybe a cash out loan might be more appropriate.
Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes
7y
Thanks @Andrew Postell. I understand the concern about rising interest rate, and that's why I mentioned that you can find fixed Interest HELOC. I see so after HELOC ends draw period, it becomes a mortgage. That part i didn't know, so as long as i can pay back before end of draw period, it should be good.
I do not want to use LOC or Cash-out Refi, because I'd rather draw as much as I need when I need it as opposed to having extra cash laying around with no good investment, but with increased interest payments on my loans. I think best strategy for me would be to use HELOC, purchase home, and cashout refi on investment properties acquired from it before the draw period ends.
East Texas · Member since 2018 · 205 posts · 138 votes
7y
I have been searching for a HELOC instead of the lump sum loan due to all the stated reasons above. I only need small amounts which will be immediately payed back upon refinancing of the property. Wash, rinse, repeat and I will never need the full amount that my HEL requires me to take.
Rental Property Investor · Queens, NY · Member since 2018 · 99 posts · 70 votes
7y
@Michinori Kaneko
My situation is exactly like your’s. And I have recently obtained a HELOC as well. My thought is you have 10 years before the HELOC mature, and imagine the properties you can acquire over the 10 years period. The appreciation on the properties will be enough to pay back the HELOC with this conservative approach. So I wouldn’t worry so much at the end of 10th year. If you use the HELOC and leverage more with cash out refinance, you can accumulate a lot more with BRRR strategy. Also, HELOC works as true cash, so you can close properties quicker than most people and giving you a better chance to win an offer.
Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes
7y
Thanks guys!
@Leo Poon Ah! you are from Queens too! Where in queens are you? good to know people think the same way I do. Do you cash purchase, then immediately cashout refi?
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
7y
@Michinori Kaneko a when you say a HEL is like a mortgage, it is a mortgage! It could be a second mortgage or primary if your home was previously paid off.
I think you summarized pretty well. There may also be differences in closing costs. My HELOC was really cheap to open. It was under $500 and was a one time expense.
Choosing between the two depends on how you are using the money. If you expect the capital to be deployed long term, then getting a second mortgage makes sense because you can get a better long term fixed rate. If you want an account you can draw from and then pay back, then a line of credit (HELOC) makes sense.
For example you could use a HELOC to make "cash" purchases. Then you put a traditional loan on the property and use that money to pay off your HELOC. If you are a flipper then you may use a HELOC to acquire and carry properties, then pay off the HELOC when you sell.
In my opinion for investors, a HELOC is best. If you were putting an addition on your home, then a second mortgage makes sense.
Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes
7y
@Joe Splitrock Thank you for your response! I'm more of buy and hold investor, but I think it still makes more sense to go HELOC as opposed to Home Equity. even better with lower closing cost! Now I need to find a good HELOC provider near my area :)
@Leo Poon can you also tell me what provider you chose and your experience with them? Thank you!
Rental Property Investor · Queens, NY · Member since 2018 · 99 posts · 70 votes
7y
@Michinori Kaneko I am near Flushing area. How about you? I am debating either buying commercial or buy smaller duplex or quadplex with cash, then refi later. It really depends on the deal, so I am not rushing. And I plan to invest outside of NYC. I used PenFed Credit Union for the HELOC, the process was very straightforward and got the fund within a month. If you are interested in discussing real estate, we can meet up in Queens sometime.
Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes
7y
@Nick Rutkowski Hi Nick, You can find an interest only HELOC. Usually it's only interest only during the draw period though, and then it converts into P&I, i believe.
Architect · Cary, NC · Member since 2018 · 96 posts · 63 votes
7y
I went through this same analysis a couple years back. I am a buy and hold investor and in the end the HELOC was the best option for me.
1. Use it, pay it back, repeat.
2. Low closing costs.
3. Can up the amount easily if your house increases in value. Just ask for a new appraissal(bank paid for it)
4. Great If your looking to have a quick source of cash for your next deal. You dont need to pay finance charges while you search for your next deal. Unlike the Refi cash out option, you just pull out money from your HELOC when you need it.
5. Mine is a variable rate and the rates are going up. If you plan on paying it off as soon as possible, its just a cost of doing business in my opinion. I don't think I saw a fixed option at the time or maybe there were additional stipulations that didn't work for me.
6. Biggest and most important, Allowed me to purchase my next property. Otherwise I would have needed to wait a few years to recuperate my funds. Equity baby!
I will follow all of this up with the fact that I have since paid the entire thing off which felt great. Waiting to repeat at the moment.
I used Citizens bank, but there are many many options out there.
Architect · Cary, NC · Member since 2018 · 96 posts · 63 votes
7y
@Michinori Kaneko, I did the BRRRR strategy minus 1 R. Bought, Renovated, Rented and Repeated. I did not refinance because I have a nice interest rate on the original 30 year note and to me the HELOC is essentially a refinance for the added equity in the house. I used the monthly cash flow from my rents to pay down the HELOC.
I also used excess monthly fund from my day job to hack away at the HELOC as well. Personally, I wanted to be HELOC free as soon as possible for my own peace of mind.
Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes
7y
@Alex Furini I see. but wouldn't it make sense to cash refi your newer properties (that you used HELOC to buy) and use that cash to pay back the HELOC? you are right that when you refi you will lock into a higher rate then your initial loan, but that gets offset by reducing the risk of your HELOC interest rate going up. Just a though.
San Francisco, CA · Member since 2018 · 62 posts · 20 votes
7y
@Michinori Kaneko, hey I’m In the same situation where I got approved for heloc from my primary residence to invest in out of state rental for cash flow and long term holding. However, I debating using equity loan Instead because if I purchase turnkey and house doesn’t appreciate for me to refinance for a fixed loan to paid off the heloc since it variable interest rate then I’m stuck. So I thinking of equity loan? Am I doing this correctly?
Great thread. I am looking at purchasing a rental property with a HELOC as we have a significant amount of equity in our home. I'd like to purchase the property using the HELOC as a cash purchase, rehab the property, rent it, and try to refinance to get most if not all of our money out of the property. I would then like apply the new loan directly to the HELOC to pay it down or pay it off completely. In this situation, will the HELOC count against us in a debt/equity calculation for the new loan? If this is true, are there any ways around this? Any thoughts from the more experienced would be greatly appreciated.
Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
7y
@Kevin Zhang an equity loan though it is a fixed loan will likely be a higher interest rate than a variable rate Heloc initially. Ideally, one can use a Heloc and then pay it off/down quickly since it is a variable rate tied to prime for example. If you can buy a value add deal and force some equity or if you are doing a fix and flip then a Heloc is the way to go since the rate would be lower. However, if you are going to purchase a turnkey property with a long term loan it's probably best to use a fixed rate loan product. You could do a cash-out refi on your primary rather than a equity loan although this could result in a higher effective total interest rate as opposed to simply getting an equity loan to purchase the new turnkey property. Keep in mind, a cash-out refi has more expensive closing costs and your rate will almost certainly be higher than it is now. So more than likely a Heloc is the better option for a short term need (6-12 months) whereas an equity loan is more than likely the better option for a long term need (buy/hold) unless you can pay off/down a Heloc ultra fast (ie in 2 years).
Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
7y
@Patrick Sanders my understanding is the Heloc is not viewed the same as other debt in the DTI calculations since it is basically equity (ie backed by your RE) and once you refi that balance is going away anyhow. A Heloc balance is not a big factor in your DTI ratio if at all. You will want to make sure the rest of your DTI picture stays healthy though (ie as low as possible). Maybe @Chris Mason can confirm my response here is on solid ground.
San Francisco, CA · Member since 2018 · 62 posts · 20 votes
7y
@Brian G. nice response! Looks like I might with with cash out refinance since the rate is still low. I like brrr but I don’t have enough experience or team member to have trust to handle the job.
Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
7y
@Kevin Zhang what is your rate now and what do you expect it to be on a cash-out refi? How much higher will your payment be? Ideally, if you decide to cash out refi, your next investment will cover the difference between your old/new payment and then some so that your overall cash-flow position increases.
San Francisco, CA · Member since 2018 · 62 posts · 20 votes
7y
@Brian G. currently, my rate is 3.125 and after refi cash out it's going ot 4.75%. My payment for a 400k cash out will be like $600 more per month than my currently monthly mortgage is why it's appealing and going through financing 80% of the loan and figuring out what my payment is after.
Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes
7y
@Kevin Zhang the primary difference between HELOC and HEL is that HELOC is line of credit, and most of the times they only require interest only payments during the draw period. For mine, it's 10 year draw period, so I only accrue interest on amount i borrow. For instance, if the total amount i can borrow is 100k, but i only need $40k, I can borrow just $40k under HELOC and pay only interest on it for the first 10 years (unless i pay it off), but with Home Equity Loan, you are stuck with whatever full amount you borrowed and have to pay for the principal amount every month as well. For me, HELOC made more sense as I can draw or pay back as much as possible, and not having to pay back principal amount every month allows me to invest that amount in other investments as well (as long as you can beat the interest rate on the HELOC). Sure the variable rate sounds pretty scary, but how much can rates really vary in few years? If the interest does skyrocket, then you can always pull out equity from your investment properties to pay off your HELOC. Just a thought!