HELOC

18 Replies

This may be a rudimentary question, but if you own your primary residence outright, is it a good idea to pull out at HELOC on your home so you can acquire property, rather than going with the traditional loan or a hard money lender?

Derek,

HELOC's can be a useful tool as long as you have a get away plan. It's basically a large credit card secured by your house. The payments are low, but there also interest only, and at some point (depending on the agreement, usually between 5-10 years) you will have to start paying principal and interest. Plus, most of the time it will be an adjustable rate. Remember this will be a lien on the home you and your family live in, so if things go south.......

Depending on the amount you plan to borrow, it can be a great option. However if you can get financing on the residence that will allow you much more freedom. My advice would be use a HELOC for the down payment if you are short on funds, and finance the rest with a traditional loan if possible.

Joe Impagliazzo

1-800-333-3004 x3138

I've used 4 Helocs to purchase property. Everything@Joe Impagliazzo said, but also that you can refi out after paying cash for a property - depending on the amount. Purchasing with cash gives you much more flexibility and speed in purchasing. And with a Heloc, you can pay it back and then that money is available again.

Yes, be careful with the exit strategies. Most of ours are interest only for 10 years, at about 5.5%. But there are no closing costs, other than maybe a $100 application fee and $50 a year maintenance fee.

I've used hard money but want to do a HELOC for my flips. What are the serious cons here? With my hard money I pay thousands in high interest and points. Why isn't this approach more popular?

@Joe Impagliazzo We're looking at using a HELOC to purchase our next property as well, but are in the same boat and don't know much about them. If we use it for the down payment, then we are 100% financed. Do you forego your typical cash flow (or any) to pay both loans until the HELOC is paid off? You mentioned only paying interest, how does that work?

@Matt Faix  

Technically the property would not be 100% financed because the HELOC part is a lien on another property. The minimum payment due is interest only, and the rates are usually adjustable so it is human nature to pay the minimum. It is like a credit card attached to your house with a better rate, however at some point, 5,7, 10 years down the road you will be required to pay principal and interest and have it paid off in a certain amount of time depending on the agreement.

Originally posted by Aly NA:

I've used 4 Helocs to purchase property. Everything@Joe Impagliazzo said, but also that you can refi out after paying cash for a property - depending on the amount. Purchasing with cash gives you much more flexibility and speed in purchasing. And with a Heloc, you can pay it back and then that money is available again.

Yes, be careful with the exit strategies. Most of ours are interest only for 10 years, at about 5.5%. But there are no closing costs, other than maybe a $100 application fee and $50 a year maintenance fee.

This is all great information! Do you have to go with the current mortgage lender for a HELOC, or can you shop around? If one can shop around, what bank have you gone with?

Hi @Angel Gracia , we used TD Bank. We paid cash originally for all the properties that we did Helocs on. I'd start with TD Bank.

Aly NA Oh okay! See I still have a mortgage on my house...

Stop in and talk to them,  you never know what they can do for you.

I know this post is a bit old but...  I am considering a heloc as the dp also. I have around 200k equity with 250k remaiming in my mortgage. The extras debt does concern me though especially because it is tied to my primary home. Is this an option that is used often? I would pay off the heloc as fast as possible. Can you get a fixed rate heloc? 

A fixed rate HELOC is really a Home Equity Loan. Yes you can get it but for a real estate investor I don't think they are a better deal. The interest rate will be higher and you HAVE to make the PI payment every month. The HELOC will accomplish the same thing except the rate will be lower and you have the option of making the principle payment or not. Pretty much boils down to how disciplined you are with your money and whether or not you need to pay the bank to force you to repay the loan.

HELOCs are adjustable to so you need to factor in an increasing payment as rates start to go up. You need to be very responsible with a HELOC on your Primary Residence because if you default you absolutely can lose your house. If you are smart and conservative with that money though it should not be an issue. It is typically the cheapest funding you can attain and allows you the flexibility to be a cash buyer.

Is it used often? I have used often. It is best with a quick payout exit strategy (quick paydown, refi, sell) so that you can reuse the money over and over. Then use the profit you make for down payments on long term buy and holds. Otherwise you will be tapped out rather quickly with the HELOC and rising rates become more of a threat if your cash flow is dependent on the low HELOC payment.

if you are using the $ to flip, keep in mind, the flip profits will be taxed at a much higher rate since you can't deduct the HELOC interest from the profits.

you do get to deduct it on your personal return.

let's say you flip and make $.  typically, If in the 25% tax bracket, let's say it comes to 44% tax.

the heloc interest came to $1500.  you'll get a 25% deduction on the $1500 but pay 44% on the $1500 on your flip profits.

it'd still be cheap hard $ though; just gotta run your numbers. also, heloc's interest rates are super cheap with minimal (if any) closing/renewal costs).

@Scott w.

@Edward B.

Thanks for your responses I appreciate it. I think I am more interested in the buy and hold at this point. I have an 8-5 6 says a week job and don't think I could handle a flip. I make good money but want to build a real estate portfolio for retirement purposes. I am not ready to pull the trigger yet I need to build up my emergency fund first. So I am currently trying to learn as much as I can. 

So if I use the heloc I need to buy at enough of a discount to pay back the heloc. 

Again thank you guys for replying!

What is considered termination of a HELOC? Is it paying the HELOC back? or having the lein removed from my primary residence?

Would I be charged a termination fee if I took a heloc out on my primary residence to fund a flip. 

After the sale of the first flip I would want to pay the Heloc back and use it again to fund a second flip. 

I posted this on another thread but seem appropriate to post here as well.

You could leverage your HELOC to accelerate payment on your house, then tap into the equity to purchase more investment properties. This is an example of what to do.

Take out a simple interest home equity line at 4.4% (keep in mind that HELOCs usually have a variable rate)

Lets say that's $40,000 and you pay $20,000 of that toward your mortgage. (Accelerating payoff of amortized debt)

Now setup and use your HELOC as your bank account and deposit all of your income into your HELOC. Since you are paying simple daily interest, deposit your income at the beginning of the month, and pay your expenses at the end of the month therefore keeping the balance as low as possible. If you can have a lower balance for a majority of the month, you'll save a great deal on interest.

Allow any surplus to remain in the account to pay down your HELOC balance back to zero. This won't work if you're living paycheck to paycheck. You need some surplus at the end of every month to pay down the principle.

When you reach a zero balance, pay another 20k from your line to the mortgage. Repeat this chunking process until your mortgage is paid off.

When applying this strategy, most people can pay off their 30 year mortgage in 6 - 10 years, even faster in some cases just depending on how long you've had the mortgage when you start.

I work with some banks that do 30 year fixed, first position Lines - allowing you to pay off the mortgage and with the line and have the line in first position.

There is obviously more piece to this so this is the strategy in a nutshell. Feel free to reach out if you'd like more info to learn how to do this.

This is very helpful thread. 

@Joe Impagliazzo

Question: I own one property that I rent out that now has a fair amount of equity. I called the bank that holds the current mortgage and they said the HELOC rate would by an additional 1% (Prime + 1.00%) since it's an investment property. Is this pretty standard for lenders? Are HELOC rates at banks that don't have your mortgage typically higher?

@Matt S.

yes that is not bad at all. Most banks will only do HELOC's on primary residences and maybe second homes.

I'm also interested in doing this. My HELOC has an option to convert to a fixed loan if interest starts to rise. But I like the flexibility of the line for now.

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