Question about HELOC

[Max Katelouzos]

I am new to investing and gathering information for my first deal. I'm interested in a HELOC but had a question. Let's say we are hypothetically headed for a downturn in the market and my equity is as high as it will be for the next year+. Should I worry about my house decreasing in value and owing more than it is worth if I were to do a HELOC? Thanks in advance.

[Mike McCarthy]

@Max Katelouzos you should definitely be aware, though probably not concerned. Here’s why:

Maxing our your loan (and decreasing equity) in anything is a bit risky. If your house is valued at $500K and you have 90% of that value tied up in loans (mortgage + HELOC) ($450K), then the housing market drops, and you can sell your house for a max of $425K, you're now stuck underwater. This is what happened to a LOT of homeowners in 2008. They borrowed more than they should have. (We'll save the why that happened for other discussions). But this is why you shouldn't over-leverage yourself in any situation. You always want to be able to sell your asset and get your money back.

But investing using a HELOC has another twist. If you take that loaned money and buy another asset, you still have some leverage risk, but you're offsetting it with a sellable asset (as opposed to taking your HELOC proceeds and going to Vegas). If there is a downturn, you can sell your investment property and pay back the heloc.

Of course, that level of leverage and risk varies person to person. There are some here who say you can leverage easily 80% of your property value. Others want to keep it around 50% to feel safe... and others argue that 0% is the way to go.

The most important piece is that you understand where you are and what you are comfortable with.