HELOCs more of a liability or asset ?

[Chris Porter]

Have become very frustrated trying to obtain financing on a second home (will also use as a short term rental). I thought a HELOC was a common way to obtain equity from your primary home and use as a down payment for a second home. But as soon as you do that, the minimum payment you have to make on the HELOC becomes a liability in your debt-to-income ratio. And this liability is throwing my DTI way out of whack and I can't get approved for financing.

For my scenario (not the exact numbers but close), I have $200,000 in equity from my primary home and available to me through my HELOC. I need that $200,000 as a 20% down payment for a second home. The minimum monthly payment on my HELOC is 1.25%, so I will be required to pay $2500 monthly on the HELOC once $200,000 is drawn out of it. But banks then consider that $2500 as a liability when calculating my DTI. So my equity asset derails financing because it also becomes a liability pushing my DTI well past 43%.

My HELOC interest rate is 4.2% meaning I pay $700 interest on the HELOC, but have to pay a minimum payment of $2500. I'm just starting the 10-year draw period. I could draw back ($2500 payment - $700 interest) = $1800 back out if I wanted to. But banks don't consider that. To them the HELOC is nota $700 liability, but instead a $2500 monthly liability.

I've read a lot of material that always references HELOCs as being good to get the equity out of your house and finance a second home. My experience is the exact opposite. It's as much if not more a hindrance than a help to the process. To me, now it seems a cash-out refinance is the only way. Where am I wrong ? After going through the process of setting up the HELOC (including all the fees), I can't stomach going through yet another process (and additional fees) to get a cash-out refinance. Not to mention I don't want a new mortgage on my primary home and extend the term out beyond what's left on it now. I've never read of such as experience with using a HELOC for financing a second home. I thought I was doing it the right way.

Very frustrated to say the least. 

[Nick Velez]

@Chris Porter

Hi Chris, 

A lot of people will take a HELOC out and then pursue a DSCR loan with those funds. DSCR loans do not take into account your personal DTI so it completely eliminates that issue. While the HELOC is still an extra liability regardless due to the minimum payment, if the numbers make sense on the new property then I would proceed.
Hope that helps!