HELOC: Applying for the first time

2 Replies

Hello BiggerPockets family. Currently, I am doing some research to apply for my first HELOC. I would greatly appreciate any advice you all may have for me.

STATS for property & self :

  • -Primary SFH since 11/2018
  • -No other loans (no student loans, personal loans, or car loans)
  • -Credit cards: 4 in total with zero balances
  • -W2 employee

Questions:

  • -Is it better to get a home appraisal before applying for the HELOC, so I know a more accurate estimate of equity?
  • -What lenders have you used and would recommend? I have heard that PenFed and Bank of America were top contenders.
  • -Is there a minimum lending amount that lenders require for HELOCS? I think I read many lenders require at least $25K
  • -Has having a HELOC decreased your credit score?
  • -Will having a HELOC on a primary home interfere with the purchase of another home. For ex: If I get a HELOC on my primary home in January 2022, but like 6 months later turn that primary home into a rental and purchase a second primary home, would this be an issue?

Thank you for your time! -- LB

Lawrence.

You ask a lot of great questions and those should be asked in each situation. First I have to advise doing a cash out refinance on the home rather than a HELOC. Meaning take the cash out you need have one loan, rate, payment and most importantly cash in hand -liquid reserves. In some cases people decide not to do a cash out because the rate on the first is extremely low but even in those cases cash may be the wiser choice.

Here are some issues with a HELOC - They are a liability, open end mortgage (basically a credit card) - They carry a ARM or Fixed Term rate set for 3/5/7 years with generally a higher rate then what you could get on a 30 Year fixed currently (Especially for the lower loan amount under $80K) Yes - they can hurt your credit because again its a open end credit card so when the balance gets above 40% of the credit limit it will have an effect of the credit score. Should something happen even out of your control the "What if factor" and you miss any payment on any debt on credit. They have the right and 99.99% of the time will reduce you credit limit.

It is possible having the HELOC it could hurt the second homme purchase if the DTI is higher due to the HELOC monthly payment. At the end of the day if your only taking out a small amount like $5K it may be a better option unless your rate can be reduced. The cash out refinance also puts cash into your hands for reserves and a lot of banks/lenders require monthly reserves to buy a second home or investment properties. You cannot use a HELOC for required reserves!

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