Risks of using a home equity line of credit?

10 Replies

I am considering the use of a home equity line of credit in the future.

I do own a home, but am hesitant to take out an equity line of credit on it because it is our primary residence. 

  • I do intend to leverage the equity in my investment properties, but I would like to try and keep my primary residence out of the investment business.

Is this a good idea or am I leaving a relatively low risk opportunity on the table?

What are the risks associated with home equity lines of credit?

Your real risk is that home depreciate and then you owe more than the house is currently worth. However, if you want to hold it long term anyways, this may not really be an issue, as markets move in cycles.

Unless your investment properties are in a LLC your personal residence is already at risk because of your investment business.

Using debt capital always carries a certain amount of risk.  For instance, if I am cash flowing $1,000 on a property bought with cash compared to cash flowing $400 on a property with a mortgage.  My chances of not being able to cash flow is greater with the one with a mortgage.  The level of risk depends on your whole financial picture.

The difference with this loan is that it is tied directly to your residence and it would be easier for them to get to your home than with other loans.

I hope this gives you a way to look at it.  I have used my heloc several times for investment purposes.

Good Luck.

Bill

Thanks, very helpful.

@Brant Richardson  

  • I will be holding the properties in an LLC from the start.

@Bill Jacobsen  

  • Your ratios put things into perspective.
  • Once I settle on a bank to business with I will talk to them about using the HELOC.

Chris

@Chris Stomdahl it is really a difficult question to answer w/o more information- How long do you plan to keep your primary residence?  How soon do you plan to spend the money (ie- buy right away or for reserves/emergencies/opportunities)?  Have you considered a cash out refi?  Do you have worries about debt on your primary residence?

Cashing out your primary would offer you the best rate IMO, but as mentioned- there are a lot of factors involved.

@Pete T.  

How long do you plan to keep your primary residence?

  • Long term, no intention on selling ever. Great price, property and location.

How soon do you plan to spend the money (ie- buy right away or for reserves/emergencies/opportunities)?

  • Buy right away/ASAP. We have reserves/savings in a money market. This would be for downpayment/downpayments purposes specifically.

Have you considered a cash out refi? 

  • No, I have not. Please elaborate. I have not quite wrapped my head around the refi/pull money out concept. I planned on reserarching/applying in the future but did not consider it for the primary residence. Definitely interested in learning more.

Do you have worries about debt on your primary residence?

  • No. Debt service is covered.

I like the HELOC idea better than the cash out refi. With the HELOC you take it in and out, pay it back when you sell the flip, if that's the idea. The cash out refi is permanently pulling the money. I had a 200k HELOC on our house I used when I was in contracting, as we could have 200k spent on a job before we saw the first draw. It was also cheaper, prime minus a quarter point. Of course, if you lose the money, oops.

@Wayne Brooks I agree about the ability to take and pay back, but from my experience it wasnt cheaper. Maybe its different w/a primary residence, but I wouldnt see any reason to do anything but a HELOC if it was cheaper as well. The ones I have used were not fixed rates and moved up pretty quickly over time. Plus a lot have draw time limits as well (5-10 yrs).

Personally, I like the HELOC. I have used mine to buy 5 different properties and most currently to pay off a private second. We wanted to extend the loan but the lender wanted to up the rate to 8%. We opted to use our HELOC at 4% instead. I'll have it paid off in about 10 months and ready to use again as needed.

If you can generate enough cash, from whatever means, to pay cash for properties you would benefit with a better price, thereby reducing your risk. If you leverage your home but buy and rental F&C then you have basically stayed the same as fully leveraging your rental and not borrowing on your home. The difference is you get better rates on your home. 

Investing in itself is risky. When you leverage you up the risk. If/when values drop your leverage will bite you in the butt. If/when values rise your cash on cash return skyrockets and you are a hero.

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