The process of a HELOC
Hey BP,
I'm truly trying to get a firm grasp on how a HELOC works. My wife and I are currently considering taking one out on the property we live in to purchase our first rental property. The problem is I'm still unsure of how it all comes together. Is there someone whose gone through this process actually lay it out for us? Any pitfalls to look for? Etc.
Thanks BP
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Its like a big credit card. Usually the underwriting process is a bit easier. They will extend a credit from the equity of your home and you can withdrawal as you please, and then put it back whenever. This way you dong have to keep refinancing your house to get cash for deals. It is usually interest only payments for about 10 years to which you need to put the entire principle back. The interest rate is usually variable so sometimes It can get a bit scary. My apologies im a bit scatterbrained this morning but I hope this helps at all.
I'm getting a 100k HELOC now and intend to use it for my first rental property purchase, so we are in the same boat.
You just have to run the numbers and make sure it makes sense. If you buying a property for cash, you need to make sure your rent can cover those HELOC payments along with your other expenses. If you are using your HELOC for a downpayment, your rent needs to cover the cost of your new mortgage, HELOC and expenses.
I'm analizing a lot of deals now; must have looked at close to 100 over the course of the last week and this method makes it tough to find a property that makes sense numbers wise, however there have been quite a few that have been break-even given this scenario so i know there will eventually be one that provides some cash flow, even when using a HELOC, i just have to find them.
Good luck!
When i open my Heloc there was a $200+ fee for the appraisal. There is no other fee rather than that. And $75 annual fee to keep the HELOC. Hope this help.
I opened a HELOC a couple of months ago. I used Navy Federal which offers up to 95% LTV. I did pay about $500 for an appraisal and my closing costs were only $25. My interest rate is at 6% now but is adjustable. I have a 20 year draw period and another 20 years to pay it off after that. The entire process took about 6 weeks. I'm planning on using the $ to buy flips in order to fund down payments for more rentals.
I used HELOC's to use as down payments on my rental properties. Loan requirements change time to time and from bank to bank, so you have to check what the currently are, and you already got some good comments.
Just to forewarn you when I approach banks to get my NOO mortgage, and if you tell them the down payment is from a HELOC, the answer is "NO, you cannot use it, it got to be seasoned funds". It happened to me.
Fortunately, my wife had a joint account with her mom of many years, and we were able to show we had seasoned funds. Spoke to some people who suggested we move money over from the HELOC to a money market fund for a short while. A co-worker had a friend add his name to a bank account to show as seasoned funds. Which ever way, put the account down on the loan application, and this way, they won't even have to ask you.
Turned out I went to the closing and was able to use the HELOC, so there's no problem there.
It would be odd to have no closing costs on a HELOC as it is a security interest like any other mortgage or deed of trust... so the instrument will need to be recorded, title insurance may be required, there may be closing fees and transfer or recordation taxes due, etc., depending on where the property is located.
For those who think they paid no closing costs either the bank covered those or they in fact paid them because they were included in the first draw.
- Tom Gimer
You can also look in to investor lines of credit. The rates might be slightly higher but works similarly
I have a heloc w/ a credit union and there were no fees. I got a fixed rate for the first year and variable after. Interest only payments so flip that house quick so you can put the money back, or make sure your cash flow on a buy and hold is good enough to pay the interest on the heloc until you can refi out of it.
@Frank Chin Is it risky using a HELOC to fund your rental properties? How do you protect yourself/put the money back in due time before it goes from fixed rate to variable rate?
I want to have HELOCs in my investor toolbox one day, but I mainly want to be a buy and hold investor.
No, not a problem. I generally use the HELOC to fund the 10% down, the rest of the funding is a fixed rate mortgage. I generally go for good cash flow, and in the NY market, rents and property values go up quickly, the problem evaporates in a few years anyway.
HELOCs help me get into the property, and currently, I'm mortgage free.
@Frank Chin I appreciate the reply and advice. I'll definitely take heed of that!
@Alpesh Parmar would love to talk sometime. I’m considering the same strategy and would love to hear any lessons/pitfalls you’ve gained. Will pm you.
Sure Brian.
