HELOC and House Hacking Rookie

[Nikki Grassmann]

Hello all! 👋

I’m new here and hungry to learn more. Below I’m going to outline our current position and the outcomes we’re working towards. If anyone more seasoned in real estate investing has any advice I’d love to hear it! I appreciate any and all input ☺️

So I own a home purchased in 2015 in an area where home values have exploded. I have a beautiful interest rate, 3.25 I believe, and owe a little less than 170k. Houses in the neighborhood have recently sold for between 480k and 560k. Another renovated home has been listed at 640k. We have remodeled since moving in and my house has a little more square footage than the ones that sold and also has a pool.

Here's where we would welcome any and all feedback. Husband and I are wanting to do a HELOC. That said, with the equity, we would like to put a down payment on a multi family unit, rent out one (or more!) and move into one unit to house hack it while long term renting out our home. We know the numbers have to work with long term renting however if we can acquire 3 or 4 units in an area that allows short term rentals we are managing a short term rental property and would like to host a property we own.

Specific questions are:

Is it possible to have a HELOC and qualify for a second conventional loan?

I heard about a program Fannie Mae and Freddie Mac are launching in November where you can put down 5% and use projected income from other units to help your DTI when qualifying for multi family units, does anyone have more information on that?

Would you consider a commercial loan for the second property?

Is there something you think we may not have considered that we should consider?

[Jason Wray]

Hi Nikki,

I see you are over in Tampa I am over in St. Petersburg just over the Howard Franklin! My advice would be to use the equity in the home and you have (2) options. Cash out refinance or HELOC and having a 3.25% is hard to lose so a cash out refinance may seem crazy. But if you weigh out the pro's and con's you might be better off versus the heloc.

Heloc is a debt obligation and can hurt your future chances of buying a home and other investment properties. The only benefit is you only pay on what you use but eventually that payment will increase after down payment, renovations etc. So in the long run 90% of people who take out a heloc refinance to consolidate it down the road.

A heloc cannot ever be used as an asset or for PITI reserves which is required when buying a new home or investment property. When you do a cash out refinance its non taxable, can be placed in the bank and used as an asset or for PITI reserves. When you go to buy a new home the bank/lender will use the heloc's maximum payment against you that can effect DTI debt to income ratios. The Heloc is usually set up on a shorter term (less years) and that means higher payment.

Cash out refinance is set up on a 30 year loan typically with lower rates versus Heloc prime + 2-3 points. I would run the numbers on both to see which offers the lower payment and less future issues. keep in mind when you have a Heloc the bank or lender holding that heloc can close or reduce the amount any time your credit drops or if they feel you have excessive trade lines basically to much debt.

There would not be a need for a commercial loan because you are buying a 2-4 unit. Anything 5+ units is considered commercial and requires commercial lending. 

There is a lot more comfort in having cash in the bank being cash fluid over a line of credit.