The Perfect fixed rate Mortgage HELOC Hybrid?

Question

I've been contemplating how to maximize my access to cheap debt. I currently own over a million dollars in single-family rental properties and have a secondary HELOC on one of them which is allowing me to access some of the equity in just one of the properties. My frustration is that I would like access to more of the equity inside some of the properties which is in there due to years of appreciation and due to the principle mortgage paydown but I would like to not have to refinance or finance a new HELOC each time I want to access more of this equity. I'd also like to lock in an inexpensive fix rate not just have a first lean variable HELOC.

Does anyone know of a Bank or financial institution which would allow one to lock in a Fixed rate mortgage and a Type of Secondary lean HELOC at the same time? The perfect product would then allow me to access more capital from the HELOC as I pay the fixed-rate mortgage each month equal to the principle paydown amount. The perfect product would also allow me to get reappraisals every so often to access more asset appreciation if I opted for that. This would give me the benefits of the cheaper fixed rate aswell as maximum access to capital all in the same product through the same Institution? I think it would be a big win for the bank aswell because they would get the mortgage and the HELOC Interest money when I access it both with the security of being the primary lean holder. If this is a thing I'd love to hear about it and to whom i need to talk with to get it!

Tyler Robinson · Answer

Joseph Firmin,

I appreciate the response. My concern with the 1st lien position HELOC is the variable interest rate. I'm currently getting a fixed 4% because I bought these homes as primary residents. I think that's pretty awesome as far as interest rates go on properties that are now investments. I'm 30 years old and have acquired these properties in just the last few years so my total portfolio equity position is probably only 25% to maybe 35%. I know interest rates are likely to stay lower for a while but I'm not sure it would be prudent to have a variable rate especially if it's substantially higher.

The secured business Line of credit could work but the interest is usually higher there aswell and i'd have to refinance my credit lines to be able to access more appreciation capital over time.

I'd really like it if there was like a hybrid of the two. A product which allows one access to the equity but also have the security of the fixed long term rate. I don't fully understand why a product like this wouldn't be available either because it seems to me like it would help the bank to make more interest money on responsible creditworthy customers all while maintaining the security of collateral as a first lien holder.

I wonder if there are regulatory restrictions making something like this impossible? I'm guessing that mortgages packaged up to be sold to Fannie Mae and Freddie Mac are likely to have difficulty implementing something like this because maybe the big dogs don't like purchasing HELOCS or can't. Maybe it's to complicated to have an increased credit line second lien HELOC combined with a fixed-rate mortgage sold to these bigger investment companies. I wonder if there is something like this in the non-traditional financing space but then again those are likely to be higher interest rate options as well. I'm sure if i'm feeling this inefficiency in the system other efficient allocators of capital or investors have probably figured out a solution or are equally frustrated as I am seeing some of these same limitations. I'd like to understand why this product doesn't exist and if so would it be possible to create something like this? My gut is telling me investors would absolutely love this type of a product if it were feasible. I mean, who wouldn't want more guarantees and more access to capital if it could compete with the other interest rate options?

Joseph Firmin · Answer

Sounds like you need a business line of credit with your equity as collateral. If you could get a 1st lien position HELOC on some of these properties, that would unlock all of your equity on each one, but you'd have different HELOCs.

Joseph Firmin · Answer

@Tyler Robinson I wouldn't worry much about the variable rate especially given what rates have done over the past 15 years and where the Fed has stated they'll go for the next 3. Worst case scenario, you refinance out of it. The beauty of the first lien position HELOC with interest only payments is you use it as a checking account, that way, month after month (assuming positive cash flow), the balance drops faster because your payment will be less than a mortgage and the interest amount drops off. This is more a personal finance strategy than a product though.

I'd continue to ask around banks and lenders if they have the product you need, local banks (and don't just stop with the first person) will be more willing to either create a product like what you need vs national ones who are extremely risk averse.