HELOC 1st Lien Position
Rental Property Investor · Raleigh NC · Member since 2016 · 21 posts · 11 votes
HELOC 1st Lien Position
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Rental Property Investor · Bronx, NY · Member since 2011 · 193 posts · 322 votes
7yI'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.
39 Replies
- Lender · Member since 2018 · 21 posts · 6 votes6y
@Chris Martin
I believe that HELOC's were only called when you equity position changed below the LTV that you initially qualified. They do have the right to stop the future draws if they think your credit has changed or your ability to repay. The small print will get us everytime.
- Lender · Member since 2018 · 21 posts · 6 votes6y
@Chris Martin
Chris, wise advice about the balance sheet can't say enough about knowing the numbers.
BRRRs. - Rental properties that you buy and need to renovate (for instant appreciation), rent and refinance. The HELOC/LOC is a good interm term loan as long as you do the long term financing as soon as possible. What do you think?
If you use this type of interm financing that you can go in and out of, without fees or requalification is the least costly way to move forward. If, it is secured on a property for five or ten years depending on the terms, while the propery appreciates, you could do a flip or two. Depending on your strategy you're employing. It's either fixed or a prime rate adjustable, depending on your credit, it will be prime even or prime plus a spread. Normally, no fees and better than private money rates. The strategy should be that you're using the money or you're paying it down from positive cash flow. If, you have it on an owner occupied home and turn it into a rental you'll have a ten year draw period and a fifteen repayment schedule.
Balance sheet and knowing your number is a must.
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes6y
Originally posted by @Andy Turnauer:
@Chris Martin
I believe that HELOC's were only called when you equity position changed below the LTV that you initially qualified. They do have the right to stop the future draws if they think your credit has changed or your ability to repay. The small print will get us everytime.
Not quite.
As I posted earlier, where I provided a link to the Suntrust US Securities and Exchange filing, there were no performance factors involved with the bank's decision to call all loans and close accounts. As stated in the Suntrust 10-K "We have now eliminated Alt-A production entirely." They bailed on the LOC business and any new paper they couldn't sell (to Fannie Mae.) All accounts were closed.
Keep in mind that banks were failing all over the place at the time. The banking business and its rules all changed. Lots of bad products (like Wachovia's Pick-a-Pay loans) came back to haunt the banks. There are lots of topics here on BP about banks calling lines, like this one: Wells Fargo Bank Sucks! From that post back then, from Mike H.:
"But if you think you're the only one that got cutoff, get in line. And the line forms at the end of road, down the alley, over the hill and through the woods. A lot of people had their heloc's closed out with nothing negative even showing up. The banks were simply cutting those off because they wanted to get rid of the liability."
Many people relying on the LOC short term debt instruments were burned after the Great Recession. Many lost everything. Those of us living through it remember, and personally I'd prefer to minimize my business risk by avoiding activities like substituting fixed rate Long Term Debt with Short Term Debt. Everyone has different goals and mine may be inconsistent with yours. Take it for what it's worth.
- Member since 2019 · 1 post · 0 votes6y
@Nicole Dunlap My wife and I are also considering purchasing the RYM program. Would love to get your feedback on the program's value, etc. Thanks!
- Member since 2019 · 67 posts · 11 votes6y
@Nicole (Dunlap) Pendergrass, @Douglas Middleton
Hello Nicole and Douglas,
I would love to hear your opinion on the company and also if you can recommend lenders.
Thank you!
- Member since 2020 · 2 posts · 0 votes6y
@ Douglas Middleton. I would love to learn more about the 1st lien position HELOC and get help with viable lenders. Sounds like you've already done some research on this. Would love to connect and find out how this strategy has worked for you.
I've been trying to research on my own and was talking to lenders on the phone. However, I was told that this product is no longer offered ... by any lender. Trying to find out if that is true or not and how to go about it.
- Member since 2020 · 2 posts · 0 votes6y
@ Douglas Middleton. I would love to learn more about the 1st lien position HELOC and get help with viable lenders. Sounds like you've already done some research on this. Would love to connect and find out how this strategy has worked for you.
I've been trying to research on my own and was talking to lenders on the phone. However, I was told that this product is no longer offered ... by any lender. Trying to find out if that is true or not and how to go about it.
- Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes6y
Originally posted by @Mike Smith:
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.
The product you're talking about MIke would most likely be an AIO or all in one loan. It comes with both the Sweep Checking account that automatically takes any deposits during the day and pays principal first at 12AM each night "sweeps," over that money into the AIO or line of credit.
Some features:
-AIO or All in one - 1st position lien of credit accrues interest only after principal is paid at 12AM based on rate/365 simple interest and auto charges it to you balance on the 20th-21st of the following month (interest is basically paid slow and principle always first)
- You get 2 accounts when you setup the AIO: 1) the AIO 1st position line of credit itself, 2) The Sweep Checking account
- There are no monthly payments so long as you have available credit because the interest is added to your balance on the 20th-21st of the following month and that reports as an on time payment.
- Margin on the AIO ranges from 3.25-3.75% + 1 month libor Index (which has lately been around .16% or so). When you combine these its referred to as the "fully indexed rate," or your actual rate they'll use to calculate your daily interest
The AIO is a financial eco-system to make your money work more efficiently. There are 3 days interest is calculate and its 1) Rate, 2) method of calculation, 3) Time. Given that time cannot be altered with current technology, the AIO focuses on #2, method of calculation and thats how it gets your debt paid off quickly.
The prior Status Quo was to focus only on rate but we found out quickly that fixed 30 year loans have their pros and cons as well like anything in life.
Hope that helps.
- Real Estate Agent · Raleigh, NC · Member since 2018 · 2 posts · 0 votes5y
@Douglas Middleton
Hey Douglas!
Did you ever find the answer to this? I’m interested in the same thing I noticed that you also live in Raleigh. Would love to connect!
- 3yBill SchrimpfBusiness MemberReal Estate Agent · Reno, NV · Member since 2014 · 349 posts · 189 votes
Quote from @Chris Martin:
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).
@Chris Martin - I came across the idea of "accelerated banking" and "first position heloc" from some lame YouTube advert. Usually these are scams, but this financial instrument really does exist with FDIC and licensed mortgage lenders. I'm not going to pay some guru to generate a list of lenders and mange my bank account, I can do that, but the lending tool is interesting!
With anything, there are pro's and con's. You mention one major con of this type of financial instrument, and that is the line can be called anytime, and I get the adjustable rate issue. Are there other con's you can call out? The idea of having principal eliminated in a few years is a big pro.
Thanks in advance.
ERA Realty Central - Bill Schrimpf58 Reviews - 3yKerry BairdPro MemberRental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
@Bill Schrimpf, you might look into the All in One mortgage, which is first position, 30 years and still can draw from like a HELOC.
- Member since 2022 · 28 posts · 6 votes2y
@Chris Martin is the most logical advise I have seen for anyone looking to do this silly scam called first LEIN HELOC/ pay off you mortgage in 7-8 years. They will charge you thousand for junk information, I am in most of you guys situation, I have grow a little too big to just go through Fannie/Freddie underwriting guideline. I have 8 rental therefore 45-50 DTI is not realistic for me anymore. I have 3 properties that's free and clear therefore you have all the scam to pay your mortgage in 7 year etc. If this was as doable as the say it is. They would buy theses houses themself and pay it off in 7 plus years and become a billionaire.
It takes too much time to acquired these properties therefore just be careful before you lose your family nest eggs. I will try one 1st LEIN mortgage and see how it works for a first few year before I attempt to go all out. Secondly, if someone is charging you 3-4k for a first LEIN, I would call all banks that does 1st LEIN and apply directly. HELOC does not cost that much. Do not pay for something you can do yourself. Finally, We all know mortgage industry is not keeping up with new investors/investment scenarios, we need innovation to catch up with the time. Just take you time a vet the lenders and you will be fine @Douglas Middleton.
- Handyman · TN · Member since 2024 · 4 posts · 1 vote2yIn your scenario above, how much would you make your HELOC for if you’re using 5-10K to put into the mortgage? Example, I have $174K left on mortgage, about 100K equity. What percentage would you say for the HELOC? Then though, aren’t you stuck then, paying two loans at the same time? Does this cause you to pay more or at least a combined same payment as one mortgage? Thanks for any info you can provide!
Quote from @Joshua Silver:
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.
- Member since 2022 · 1 post · 1 vote2y
We just bought our first home with a 70% LTV 30 year fixed first mortgage, 15% HELOC, and 15% down. I was thinking to pay down the 15% HELOC and then look at a 1st lien HELOC to take out the 70% LTV 30 year fixed. Assuming my credit score doesn't change drastically, what reason would the bank have to call my 1st Lien HELOC and if it were to called, couldn't I just refinance with another bank and do a 30 year fixed at that time? I'm still new to my research into this, but this is the first question I had.
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