Can you buy a performing mortgage note with a HELOC?
Specialist · Kansas City, MO · Member since 2018 · 22 posts · 10 votes
Question: If you can use HELOC funds to buy rentals for your business, can you buy a mortgage note the same way?
What I have heard in the networking scene: Investors are using HELOCs from their personal residence to have a down payment to buy a rental property. Examples I have heard of say they just take $30K out to buy (in whole or a down payment) for a rental OR they use for funds to flip....then they either refi that residence or sell the flip and put their funds back into the HELOC. Sounds like a cheap way to use your own equity as cash (instead of 12% and 2points with a private lender).
I am wondering about buying performing mortgage notes the same way. I often come across notes such as: $50K purchase price that's paying 10% interest. If my HELOC rate is 6%, I technically am not using any personal funds to buy and it's like I'm just using the equity in my home to earn me passive income......but is this not right? Am I way off in how this could work? Do I have to have a rental house first (under a business name) to THEN take out a HELOC on it to buy the mortgage note?
Ideas? Suggestions? Any tips appreciated.
Sure, you can use a HELOC to buy whatever you want. Whether it's advisable or not is another matter.
"Do I have to have a rental house first (under a business name) to THEN take out a HELOC on it to buy the mortgage note?"
OK, that raises some red flags. The "E" in HELOC, stands for Equity. You need to have some equity in a property to qualify for a HELOC. Doesn't matter if it's a rental, or your primary residence. The way you asked the question implies you don't currently own a property to use as collateral for a HELOC. If you are going to buy a property , it's not likely you will have enough equity to get a HELOC for some time.
If you put down 25%, then you will have 25% equity, probably not enough room to quality for a HELOC. Banks will want to see that you still have 20-25% equity AFTER the HELOC amount. You could put down a bigger down payment to get instant equity, but if you have the cash for a bigger down payment then you should just use the cash to buy a note and not the HELOC.
Doesn't matter if it's under a business name or your personal name.
It's pretty risky to use a HELOC for this purpose IMHO. What if the performing note stops paying? It happens, and you need to be able to have the cash to handle it. What if real estate prices drop and all your equity disappears? If you need to sell you won't be able to unless the bank agrees to a short sale.
Question: If you can use HELOC funds to buy rentals for your business, can you buy a mortgage note the same way?
What I have heard in the networking scene: Investors are using HELOCs from their personal residence to have a down payment to buy a rental property. Examples I have heard of say they just take $30K out to buy (in whole or a down payment) for a rental OR they use for funds to flip....then they either refi that residence or sell the flip and put their funds back into the HELOC. Sounds like a cheap way to use your own equity as cash (instead of 12% and 2points with a private lender).
I am wondering about buying performing mortgage notes the same way. I often come across notes such as: $50K purchase price that's paying 10% interest. If my HELOC rate is 6%, I technically am not using any personal funds to buy and it's like I'm just using the equity in my home to earn me passive income......but is this not right? Am I way off in how this could work? Do I have to have a rental house first (under a business name) to THEN take out a HELOC on it to buy the mortgage note?
Ideas? Suggestions? Any tips appreciated.
Absolutely you can do this. It's what's known as interest rate differential arbitrage and exactly how banks operate. They borrow at lower rates (deposits, warehouse lines of credit) and lend it out at a higher rate. You would borrow from your HELOC at 6% and become the new lender at 10%. Also you typically can pick up a performing note at a discount to its face value thereby amplifying your return to more than 10%.