questions about HELOC

3 Replies

Hi All,

I purchased my primarily resident about 5 years ago, and thanks to the housing market in NY going up like crazy, I have a pretty big chunk of equity on it. I can take up to $200+K of HELOC at approximately 5% APR, and i'm thinking about using some of that to invest in properties.

I also recently went into contract on my first investment property (without using any borrowed funds).  Purchase price was $80K, and estimated net cashflow after vacancy and capex assumptions (pretty conservative) is about $2300 ~ $3200 annually (based on what I can rent for, which ranged from $1000~$1100 a month).  my upfront fees (including down payment, closing, fix up fees) is estimated around $32K.  

If I borrowed $100K HELOC, I can purchase 3 of similar stats property. My monthly interest on HELOC is about $410 (or $4920 annually). Obviously, if I had $2300 annual cashflow x 3 that can easily cover the HELOC interest payments + about $2000 of free cashflow. That's $2000 free cashflow, so that's great, right? However, once the drawing period of 10 years end, my monthly payment would essentially double, and that point, with the current numbers i'd be cash flowing negative. So here are my questions:

1. Who knows if I will still have the investment properties, or what my rents would look like, or how much the values have appreciated in 10 years.  Should I even think that far out, or should i aim for the $2000 cashflow that I could be getting now?

2. Do you use the extra cashflow ($2000) to payback the principal balance, or to maximize the benefit of leverage you only pay back interest only for the first 10 years?

3. Does only paying interest only on HELOC have negative impact on your credit scores?

4. Do you use HELOC in tangent to cashout refi on your investment properties, or should I stick with one or other?

5. What happens to interest rate/credit amount on HELOC if value of my home decreases significantly? can they call the balance back? Will my rates go up?

Thank you for your help in advance!

1. I would be putting that money back in to the HELOC by refinancing the properties after a seasoning period.

2. The Profit you will have is not necessarily 2k a month what about fixes, insurance, utilities, trash, and just pesky little repairs? 

But, yes I would put it on the amount you owe on the HELOC.

3. I am thinking that it doesn't do your DTI any good to leave that the same. so yes it will affect your credit as in you will be at a high DTI and that would make your credit go down.

4. I would HELOC for the down payment and then in 12 months refinance.

5. If the market turns south they can call the loan or reduce what you can get out of the HELOC.
6. No one can tell  you that you should or should not do anything.  We can tell you our advice.  Just remember you need to wage how safe you want to keep your home from a downturn. 

AI personally would do the HELOC for 12 months using only what i had to for down payments and pay them back with interest and principle over that time span, then I would refinance each piece.

Good luck!

Hope I helped.

Thanks Michele.  

For #2. The $2K is not monthly, its annually. that figure is net of all expenses and allowances. So effectively, if I use this amount to repay the $100K i borrowed, it would take me 50 years (actually probably less because i'd be paying off my principal early so my interest piece would be smaller). which means I will have 0 equity at 0 cost at day 1, and 100% ownership with 0 cost in year 50...

For #3. I see that makes sense. I was thinking from perspective of "not fully paying monthly payments" if that counts as missed payment or something. 

For #5. How do investors cope with that? what if I borrowed $100K and the market tanks after i used that $100K to purchase the home? Are these risks that investors that uses HELOC are considering?

Also, going off of what you said, what is the significance in cash-refi your investment property to pay off HELOC (you're effectively just swapping one loan for another). Is it just based on which interest rate is higher?

Thanks again for your opinion/advice on these :)