how does {HELOC / additional purchase Loans + debt carried} work?

Question

I am obtaining a HELOC on my primary residence to then use for the down payment(s) for investment properties, that I would also have an additional purchase loan(s) on.

What should I factor in, to decide what amount of credit I should apply for my HELOC - knowing that the purchase loan(s) lender would calculate my full HELOC amount within my carried debt?

Are there calculators or formulas that could give me an idea of how much debt I could carry (including my full HELOC amount) to obtain $X amount for my investment property purchase loan?

Is it fairly easy to go back and get my HELOC limit raised, if needed?

Melina Victoria W. · Answer

@Daniel Kim How bad would my credit score hurt if I took out 100k against my home? My credit score is 735 and my home value is 609k paid in full. I also would like to know what you would do in my situation? Would you take out a mortgage on your rental property and continue to takeout mortgages on different properties OR pay the rental in full and use the tenants rent to pay off your HELOC faster? Im new to this. Im really worried about my credit being run so many times by different mortgage companies then being rejected, i just want to make the best choice possible

Steve O. · Answer

@Daniel Kim what did you do with the Heloc, after you used for your down-payments?  Do you just keep paying it (well your tenants) or cash out refi?  I just used a heloc for a Dp and have a fixed rate for 1 year, then It adjusts to prime+1%.

Daniel Kim · Answer

Hi @Melina Bonnen, believe me, I am not an expert in this stuff by any means so eventually talking with a trusted mortgage broker or lender would probably be best.

Every lender has told me that as long as different lenders run multiple credit checks within a month's time, your credit score will not go down. The credit companies know you are just shopping around for the same loan. I've always been like, are they for real... but since I subscribe to a few credit monitoring services I will hopefully find out if my credit does go down a lot due to too many credit checks.

Wow, I have so much mortgage debt that I can't even imagine having a 609K home paid in full - good for you! I am assuming this is your personal residence? As long as you have a plan and can make your numbers work, I would consider taking an HELOC on it. Getting an HELOC on your primary is so much more easier than on a rental (even pre-Covid). I would always try to exhaust the HELOC route before going the mortgage route. The HELOC just sits there if you don't use it, as opposed to paying interest on a mortgage from the second you get one. Also, the closing costs on a HELOC are nothing compared to those on a mortgage.

Again, it all depends on your plan (California vs. out-of-state, etc.) but no, I wouldn't pay off a rental in full unless I literally had no where else to spend the money. They are always talking about "leverage" and "using other people's money" on this site, so instead of paying a mortgage off, I would use that money to buy more rentals.

Daniel Kim · Answer

@Steve Orluski The only way I have used my HELOC's are for real estate down payments. Keeping track of the interest deductions would be a nightmare for me if I started pulling from it for repairs, a new car, etc. etc. My first HELOC has a 10 year draw time during which only interest has to be paid. I was planning to chip away at the balance/keep making payments for those 10 years but this year (Year 5 of) with the interest rates being so low I just cashout refinanced and paid off all the HELOC's down to zero. Oh, great that you got a fixed rate. Mine are both prime + 1, but they have had promotions where you can lock in a balance at a fixed rate.

Daniel Kim · Answer

So, for example, I used the HELOC on my Property 1 to buy my Property 2. I'm sure you know California prices (even back in 2016) so no way I was going to have enough saved up for 20% down payment (to avoid PMI) to put down for Property 2. My HELOC on Property 1 was about 57K. I think I used 50K so, no, it wasn't the full amount, only what I used. The lender asked for a copy of the HELOC agreement in order to calculate how much the interest-only payment on 50K would be every month.

If you need to speak to a lender let me know. The mortgage broker who just got my refinances done in November actually works for a company based out of San Diego (called C2).

Janel Briones · Answer

@Daniel Kim Thank you for your response.  When you say 'required future monthly payment' that was for the FULL amount of credit of your HELCO? ~ Hoping to get some input from lenders as well.

Daniel Kim · Answer

Hi, I'm not a lender, so I just have my experiences using HELOC's as down payments to refer to.

Both of my HELOC's are currently at interest-only, so only the required future monthly payment was calculated into my DTI when applying for a purchase loan. Only when I did three refinances last year were the full HELOC amounts used in terms of the LTV.

In terms of going back and getting the HELOC limit raised, I'm not sure if most HELOC's work like that. If anything, I am in fear of the limits being suddenly lowered due to the economy. I would guess that if you wanted a higher HELOC, you would need to apply for a new one.

how does {HELOC / additional purchase Loans + debt carried} work?

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