What would you do if you were a first time buyer?

[Ana Lidia Standing]

I am planning to get my first investment house; I don't want to use my savings, so I have an equity line of credit for 50K and got pre-approved for a loan up to 300 k? it has been very difficult to find a house that makes send for BRRR since I have to use the HELOC for downpayment and possible repairs I am very limited. Most part of the houses that will qualify for the loan should be in livable conditions, and it looks like they don't need much work, so it might not be able to do BRRR. So, in your experience, what have you done or what would you do?

[Jason Wray]

Ana,

Based on experience and this market me personally I would avoid a HELOC for a few reasons. One a Heloc rate is much higher than a typical cash out refinance rate even if your first mortgage rate is low more than likely 3-4%. A Cash out refinance offers a 30 year versus a Heloc which is usually 10 to 15 years making the Heloc payment higher. Not only that but you are going to carry a Heloc in a 2nd lien position and you will not be able to pull out more cash unless you do a cash out refinance to pay off the previous Heloc and take out more cash.

85% of the home owners who take out a Heloc refinance in 3-5 years so it makes more sense to simply do a COR and avoid the future closing costs. A Heloc is also a debt burden because its a credit line not a mortgage so it gets looked at as a debt and not an "Asset". When you do a cash out refinance its cash in hand (liquid reserve) so it can be used as an asset or for PITI reserves on the next purchase.

The other downfall is if your credit score should drop for any reason which can happen even my accident or mistake the lender will close or reduce the Heloc credit limit. Fico Scores can drop fast when a person starts to open and take out multiple LOC's and mortgages which is considered "Excessive tradelines" based on your DTI.

Helocs are great for quick renovations or repairs and should be used and paid off or down quickly. You do not want to use it for a down payment where you will end up having to float it for 3-5 years before you can refinance the next home to pull out enough cash out to pay it off. You can end up locking up access to equity and cause your buying power to become frozen due to DTI or an adjustable rate.