Traditional loan or HELOC? any insights?

Question

Hi, I'm a new member from Columbia, South Carolina. I've been listening to biggerpockets.com podcast and I find this forum really educative especially for a real estate newcomer like myself. I am in the process of buying a rental property and I desperately need some insights! I have $50,000.00 to invest and I found $70000.00 patio home. so I decided to buy with 20%down and get the traditional mortgage but quickly realized that I have to pay roughly $3500.00 load processing fee to get the either 15yr or 30yr loan. question #1 should I use HELOC(which processing fee is in 7 to 800ish) from my home to pay the rest 80% and try to pay off as fast as I can or just get the traditional loan and utilize the tax benefits?

Basit Siddiqi · Answer

@Sang PakYou always have a choice...don't listen to anyone who tells you otherwise...

FIrst and foremost - you need to clarify if the $3500 is TOTAL estimated closing costs or relates to just the loan origination fee.I am also confused because you mentioned that the offer was accepted by selling agent and then you mention you were afraid of the seller getting in another offer...If the offer was accepted - What is the closing date scheduled? if it's 30+ days out - you still have time to shop for another lender.I also think you are mistaken that there is no fees associated with a Heloc. a HELOC can have a loan origination fee and may also require an appraisal of your home.

Basit Siddiqi · Answer

@Sang PakBanks charge a loan origination fee to generate a mortgage. They also require an appraisal(that gets paid to a third party).Other closing costs such as title search fees, recording fees, real estate taxes are costs that you would pay regardless if you acquired the home through a mortgage or HELOC.What consists of the $3500 fee?Loan origination fees normally range from $800 to $1,100 depending on the size of the loan and the size of the bank.(at least these are figures that I seen).Appraisals usually range from $500 to $1000 depending on the size of the house(at least from my experience).If they are really charging $3500 for a loan origination fee - I would shop around for a smaller bank and even some credit unions.

Sang Pak · Answer

WOW!!!

Thanks everyone. And I'm definitely do more shopping around now!

My heart says use HELOC and REFI later as well...

Jason G. · Answer

@Sang Pak, if you intend to use the HELOC how would that work?  Wouldn't that change the sale into a cash deal, thereby accelerating the closing and removing the financing contingency?  HELOCs are supposed to close within four to eight weeks but can take longer if underwriting requires additional information or documentation.  Is the seller willing to enter into a sale agreement that caters to you using that means of funding?  Personally, I would just use traditional financing.  You have the 20% plus closing costs, no need to make the process more complicated than it needs to be.

Corby Goade · Answer

If you can get a HELOC on your own home and use that to pay for the entire $70, that is what I would recommend. You can always refinance, but closing costs will be less, you can close almost immediately and you can negotiate more aggressively, since you are paying with "cash." I love HELOCs for all of those reasons.

Basit Siddiqi · Answer

Banks normally require 30-45 days to close on a mortgage. So if your closing date is 30 days out - you may still be able to shop around.Just because you have $50,000 doesn't mean you have to use it.20% of $70,000 is $14,000 with a balance of $56,000.

Sang Pak · Answer

Thanks for quick response, and I did not know that I can shop for another lender in next 30 days.....

I am very new to all this :(   I am learning that I should have done my homework got the loan approved before putting in an offer.

corrections, seller did not accept the offer yet, the seller would accept the offer if I came up with proof that I have the pre-approval( remember I only have 50K in cash)also seller already agreed to pay the closing coast if I can show the proof.

however, the reason I was contemplating was I did not know if I have to up potentially pay $3500.00 (loan origination fee and everything to finalize the loan for the closing and ended up with buying the property).

basically, I did not want to pay $3500.00 to get the loan of $20K vs. pay a smaller fee to get the HELOC which I could potentially lose this deal due to longer time to get it approve.

Sang Pak · Answer

Basically, I had no choice but to get the loan from finance guy(who by the way can pre-approve me in 30 minutes if I finish on-line application process) that I never met due to last minute request from the seller.

If I were to paid to get the loan regardless of the total amount, would it be smarter to get the HELOC (I have about 100K in equity in my home which will take good 3 to 5 days to get pre-approval being a weekend) or traditional loan?

although this is my first potential rental unit, I want to continue to keep buying next good deals that come along.

Will Gaston · Answer

@Sang Pak Great advice from @Basit Siddiqi. I'd definitely recommend shopping it. I don't know really do conventional 30 year mortgages but can provide some good commercial contacts that may can help you if you want to do a 15 or 20 year note. Those are very helpful for borrowing in an LLC.

Traditional loan or HELOC? any insights?

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