HELOC 1st Lien Position
Rental Property Investor · Raleigh NC · Member since 2016 · 21 posts · 11 votes
Hi fellow BP Colleagues! I am searching for a lender that will provide a HELOC in the 1st lien position on 3 rental properties I own. I am finding lots of evidence of this elusive loan product around the BP forums, but have yet to locate a lender who will offers this loan type. I live in the Raleigh NC locale. I have three rentals with a pretty good amount of equity and I would like to tap that equity while I'm paying the loan down and increasing my equity as efficiently as possible. Looking forward to getting some guidance!
I'm currently a member of Replace Your Mortgage. They do give you a list with a bunch of banks and a lot of them do 1st position HELOCs on rental properties - just might have slightly different terms than for a primary res. They also give you a list of questions to ask the bank when you are qualifying which product is best for you (so you can compare apples to apples). This is NOT take a HELOC on your primary and use it to pay off the rental, this is take a HELOC on the rental that pays off the rental's current mortgage(s) and so the HELOC is the only loan/loc on the property and is in 1st position. Could they call the loan due in a downturn? Sure, just like any other bank could if you "violate" a rule. Why is it not likely? Because the HELOC is now in 1st position (not 2nd behind a mortgage), so they have the full value of the home as collateral if you default. A lot of those builders w/lines that got called in 2008-10 more than likely didn't have 1st position collateral backing the line (maybe just the builder's track record/balance sheet - can't say 100% bc I'm not a builder! lol).
Though I understand everyone else's viewpoints, I'm as the same mindset as @Douglas Middleton. I want to access the equity in my home for other cash flowing assets w/goals of maximizing the spread btwn the interest I'm paying on the HELOC and the interest I'm earning on the asset.
One major downside is most HELOCs are adjustable rate, and I'm certain rates will be increasing even more in the near future, so finding a bank that has a rate-lock option is my hedge.
I've looked into this strategy a lot, seen the comparison numbers, and am still looking into different utilization strategies. But even if you only wanted to pay your mortgage off faster and not invest, it works as long as you are disciplined, don't increase your expenses w/o at least a corresponding increase in income and basically use the HELOC as your checking account.
@Douglas Middleton Your best bet is probably to call a local bank, ask for a commercial lender, then tell them you're looking for a "business line of credit" or "working capital line of credit." In Raleigh some that may be worth calling are Providence Bank, Mechanics & Farmers, Paragon, North State. It should not be too difficult to get if the rest of your parameters fall into place. These lines of credit generally have 1-2 year renewal periods and require you to send the bank your tax returns and possibly personal financial statement on an annual basis.
In my experience "HELOCs" are associated with your primary residence. You can qualify based on debt-to-income alone. They typically have slightly better rates, 10+ year draw periods and no annual renewal requirement. Some banks will go up to 100% LTV so you could stack a 1st position HELOC w great rate up to ~80% LTV and a 2nd position HELOC w higher rate to get access to the other ~20% if needed.
A couple years ago Wells Fargo was offering a HELOC product on a rental property that was somewhat of a hybrid between the two. The pro was a longer draw period w no renewal requirement. The con was they would only go up to 60% LTV.
@Adam Ward - This is solid information.. thanks for taking the time to write that out.
@Adam Ward
I called Wells Fargo and inquired about a heloc (I have an existing mortgage with them) and found my account to be locked because of fraudulent behavior two weeks later. Apparently who ever I spoke to that worked there tried to open up a second account under my name. My password was tried a few times, which then locked me out. I would totally suggest going to a branch office. I tried to correct the issue online and by the phone but no success. I even went to a Brooklyn office and they told me that they couldn’t help me. I then was told to go to Manhattan.
They are happy to take my money every month though.
if you own 3 or fewer total properties, PENFED will do HELOC on a rental. I got a interest only HELOC on a duplex I own through PENFED. They didn't even require an appraisal in my case. zero closing costs. Great experience
......
If you're asking about A) a single HELOC on all 3 rentals or B) three different HELOC's (one on each of your 3 rentals), I doubt they could do that. but you could ask.
Thank you all for your suggestions, references and insights. Josephine your situation sounds scary and frustrating at best and potential fraud activity at worst. Be careful!
So, has anyone heard of the "Replace your mortgage" program started up by Michael Lush? It is this program that really sparked my interest into this type of 1st lien HELOC program. I had never heard of a 1st lien HELOC until I stumbled across Mr. Lush's YouTube vid. It sounds amazing and could be a great way to rapidly pay down my mortgages while freeing up cash to use for more investments. Really compresses the wealth building time continuum from the look of it. The catch is this information comes with educational modules and wealth building investing techniques using the HELOC approach for 2k or 4k respectively, depending on which package you opt for ... of course. Along with the information and $$ investment you get a list of 200 mortgage lenders (which is really the only thing I want out of this at this stage) who will do these types of HELOCs. His program also comes with a 6 month money back guarantee if for some reason it does not work for you. Anybody have knowledge or experience with this?
You can Google "mortgage broker" yourself and save $2-$4K. Just know that all those LOCs were the first lending vehicles to be "called" in 2008-2010. I know it's a different time now, but trading long term borrowing on a long term asset for a short term LOC that can be called... that's not something I would ever recommend. But I will if you pay me $4,000!
HELOCs are for personal residences and CAN be underwritten by Fannie Mae. Second position liens on a rental CANNOT be underwritten by Fannie Mae. Virtually every mortgage broker* will use the FM Selling Guide for determining eligibility, or you google "fannie mae underwriting guidelines" for high level details. Personally, on NOO property a cash out refinance makes loads more sense than a 'first position' LOC.
*Commercial side of banks and some Credit Unions service their own originations and allow NOO collateral. You will find that 100% of the time these LOCs (not HELOCs) have higher rates than liens against your personal residence
Thanks Chris. I'm curious why you think a cash out refi makes more sense than a heloc? obviously there are advantages for both products and I suppose it greatly depends on the type of investing you do. From your perspective what are the risks vs rewards of each? I have certainly found it sometimes difficult to see all the advantages and disadvantages of financing approach if you are not quite savvy yet - which I admit I am not! Thanks for the help and your time. By the way, I have primarily wholesaled properties and acquired some rentals for long term investments. I am seeking to build my rental portfolio up in the next few years.
I'm not sure what you are using for collateral. Sounds like you are getting a HELOC against your house, use proceeds to pay off the loans on the rentals, then get lines of credit against the rentals? To me this makes little sense if you can get subsidized loans (meaning qualifying for Fannie Mae, NOO rentals) because 1) LOCs are short term debt and rentals are typically held longer term and 2) there is no guarantee the LOC wouldn't be called due by the lender... that's the nature of credit instruments.
Having said all that, when you and your membership get above 4 (or 10 depending on the current rules) Fannie Mae loans, it makes sense to get LOCs against rentals because you can't get government subsidized long term money. I posted about this about 6 years ago in this topic: Anyone getting financing on 30K properties? It's interesting that in my third post on this thread that I said about my tactic "...what I did 5 or so years ago..." which was right after the great recession when NOBODY was getting a loan and builders were going bankrupt left and right. I know, you probably can't relate. This method still works though, at least for me.
My advice is to treat your balance sheet with respect and keep your short term debt items like LOCs at a minimum if you can. People can say to me, 'well dude, you just are crazy thinking that because real estate is on fire and the bank will never call a LOC.' Right. Like 2005. Well, my response is 'How much short term borrowed money did you and your company have in 2007?' If the answer is less than $800K, then I have you beat. And, yes, we did get the demand letters, which basically said 'Pay up or we will see you at the courthouse.' Builders got CREAMED. Suntrust clobbered builders without presales by the dozens. Even some flippers got caught.
No, I'm not saying the above paragraph will happen again. But I am saying to treat your balance sheet with respect. Rentals should be financed with long term financing FIRST, and if that's not available then CAREFULLY use short term debt instruments. Above you heard the warning shot about WF... I am 'old school' and taught not to say anything if it's not nice, so I won't. I can relate, though, and after the way they treated me (a 33 year customer with cumulative 8 figures in business relationships) I have opened my last account with them. (Note: See above about how sometimes banks can change.)
I'm currently a member of Replace Your Mortgage. They do give you a list with a bunch of banks and a lot of them do 1st position HELOCs on rental properties - just might have slightly different terms than for a primary res. They also give you a list of questions to ask the bank when you are qualifying which product is best for you (so you can compare apples to apples). This is NOT take a HELOC on your primary and use it to pay off the rental, this is take a HELOC on the rental that pays off the rental's current mortgage(s) and so the HELOC is the only loan/loc on the property and is in 1st position. Could they call the loan due in a downturn? Sure, just like any other bank could if you "violate" a rule. Why is it not likely? Because the HELOC is now in 1st position (not 2nd behind a mortgage), so they have the full value of the home as collateral if you default. A lot of those builders w/lines that got called in 2008-10 more than likely didn't have 1st position collateral backing the line (maybe just the builder's track record/balance sheet - can't say 100% bc I'm not a builder! lol).
Though I understand everyone else's viewpoints, I'm as the same mindset as @Douglas Middleton. I want to access the equity in my home for other cash flowing assets w/goals of maximizing the spread btwn the interest I'm paying on the HELOC and the interest I'm earning on the asset.
One major downside is most HELOCs are adjustable rate, and I'm certain rates will be increasing even more in the near future, so finding a bank that has a rate-lock option is my hedge.
I've looked into this strategy a lot, seen the comparison numbers, and am still looking into different utilization strategies. But even if you only wanted to pay your mortgage off faster and not invest, it works as long as you are disciplined, don't increase your expenses w/o at least a corresponding increase in income and basically use the HELOC as your checking account.
You missed the point. On short term LOC, the bank can call regardless of your performance. So your comment "Could they call the loan due in a downturn? Sure, just like any other bank could if you "violate" a rule" isn't relevant. Calls were across ALL instruments regardless of accrual status.
This statement is just false: "A lot of those builders w/lines that got called in 2008-10 more than likely didn't have 1st position collateral backing the line (maybe just the builder's track record/balance sheet ..." If you can back it up, please provide documentation. Here is the Suntrust 2008 FORM 10-K page 35 https://www.sec.gov/Archives/edgar/data/750556/000119312509042448/d10k.htm that sums up the debt instruments they called for my company and tons others in 2008: "We discontinued originating first lien Alt-A loans to hold on the balance sheet during 2006 and until mid-2007 originated a small amount with more restrictive credit guidelines for placement in the secondary market. We have now eliminated Alt-A production entirely." The "first lien Alt-A loans" covered our first lien on non-owner occupied LOCs.
Regarding "One major downside is most HELOCs are adjustable rate, and I'm certain rates will be increasing even more in the near future, so finding a bank that has a rate-lock option is my hedge." Yes, indeed. One 'rate lock option' is called LONG TERM DEBT for your investment property. Refi into a 15, 20, 30 year NOO loan with government subsidized money (a Fannie Mae loan) or GOOD commercial bank. They can't call unless you default, unlike a LOC.
By eliminating your mortgage, you converted LONG TERM debt into SHORT TERM debt. Insane in my book. That's the point of my posts.
I'm not saying that today a lender will call your LOC, but I am saying it has happened before. This happened to plenty of us still here on BP and a bunch who aren't. You've made up you mind, at least you heard what happened (and could again).
@Nicole Dunlap I’m also trying to decide to become a Replace your Mortgage client. Since you’ve gone through their program, would you recommend spending this large amount of money just for this list of banks?
@Chris Martin Thanks for your reply, I def see your points. As to my false statement - if you re-read I also said "more than likely" and "can't say 100% bc I'm not a builder" mainly to be transparent that the statement was my thoughts and not from any personal experience I had. I also understand that I'm converting long term debt to short term and at a higher rate, but although the point of RYM is pay off your mortgage balance faster, I am mainly using it for the flexibility of accessing my equity so my ROE is not zero. My goal is to hedge against lost opportunity costs and use the equity to grow my portfolio faster. So what's "insane" to you can make sense to someone else. Everyone has their own experiences and reasons for doing things. But thanks for pointing out that LOCs can be called even if you are current, so I'll def look out for and ask about that. It's better to know than to be blind-sided and hopefully its something I don't end up having to deal with, but I'll cross that bridge when I get there.
@Cynthia Andersen I replied to your message :-)
@Nicole (Dunlap) Pendergrass
I've got the same question as Cynthia.
@Douglas Middleton
What did you end up doing?
@Nicole Dunlap. I came across this forum a couple days ago. If you dont mind, can you share a little about being a part of Replace tour Mortgage? This is a new concept for me and I am gathering info to help me make a decision.
I’m also trying to decide to become a Replace your Mortgage client. Since you’ve gone through their program, would you recommend spending this large amount of money just for this list of banks?
Hey Flavio,ultimately I did not purchase the program. I felt the cost was just too high for what it offered in the way of education, and as you noted, the list of banks offering 1st position HELOCs. PM me for more information as I think I can help you if you are interested in locating viable lenders. Nicole Dunlap was super helpful and really cool too. She went through the program and can give you some excellent insights as well.
Hello Nicole Dunlap, would like more information on replace your mortgage program or lenders that do 1st lien helocs.
To everyone thinking about doing a 1st position HELOC, please don't do it. You expose your entire loan to a higher, variable rate and you have to bend over backward to find one. If you want to do the replace your mortgage / velocity banking thing, all you need to do is get a smaller 2nd position HELOC and then take a piece of it ($5-$10k) and put it on your 30 year fixed. Then you pay down the HELOC over time and repeat the process. You get the same results without having to refinance your whole mortgage into a 1st HELOC and have a large balance higher variable rate loan. Basically, you're putting a smaller HELOC on top of your existing loan and then using the strategy.
The other benefit of doing it this way is if you don't like it or there's some other problem you can just pay down the HELOC and then let it sit there while you go back to the way you used to pay. If you have a problem with a 1st position HELOC it could be a headache to get out of.
I am also looking at the HELOC as a 1st and use the principles proclaimed in the Replace Your Mortgage pitch which I understand to be, Use it as a checking account and putting all your income into the HELOC and then pay bills from that account thereby using all income to more quickly reduce the interest. Meanwhile you have instant access to your homes equity. I like the sound of this but does it really work? I My Credit Union is offering this with fixed 5% with a 15yr draw or 20 year with 4.75% variable.
Joshua, I understand your point of using the HELOC as 2nd which may be close to accomplishing the lowered total interest payments but in the end, anything you push toward your traditional is locked up and not easily accessible when opportunity knocks. That easy access is what I find appealing. Thoughts?
@Adam Ward
I don't know if you have a First Merchants Bank in your area but I'd go there first because I know they're doing it for me at 75LTV.
@Douglas Middleton
Don't do A HELLO with someone who is going to sell you public information.