I bought a fixer upper as my first home and was able to build some good equity.
I tried to get a home equity loan with the intention to make a down payment on an investment property with the funds.
I was told I could not get a loan because I was already maxed out with my mortgage/income cash flow.
If my wife starts working we could then probably have the additional income and qualify for the equity loan.
My question is, what would be the point of the equity loan in that case? Given the additional income, Why not just buy a second property with a regular mortgage?
What is so appealing about buying additional properties with home equity loans?
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
3y
If you don't have a lot of cash you can use the HELOC to fund the down payment and get a mortgage for the rent property. If you have the cash, you don't necessarily need the HELOC but it can be nice to have that flexibility.
I've personally drawn funds from a HELOC to do this. A good example might be if it is the end of the year, you are buying a rent property, and you don't want to sell stocks that would trigger a big capital gain in April. You use the HELOC so you can push the stock sale until January.
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
3y
My understanding is that having a HELOC, even with a zero balance, is counted against your DTI.
If you are talking with a typical bank, that may make it hard for you to get a mortgage on a rent property. An investor-friendly lender will apply 75% of your rental income towards your DTI
So is it safe to say, a benefit of a home equity loan
Is when there is a liquidity requirement (down payment) that you otherwise do not have? Even though you do have (and must have) the overall borrowing capacity for the would be loan? -The liquidity you get from the home equity loan makes the deal possible in other words
Arvada, CO · Member since 2023 · 24 posts · 12 votes
3y
A couple potential benefits of a HELOC include lower closing costs, interest only payments, ability to reduce payments by paying down, and promotional rates. Rates will likely be higher than a mortgage, but vary over time based on federal funds rate so could come down. I'm not sure about a home equity loan, but these don't seem very common in my experience.
Arvada, CO · Member since 2023 · 24 posts · 12 votes
3y
A couple potential benefits of a HELOC include lower closing costs, interest only payments, ability to reduce payments by paying down, and promotional rates. Rates will likely be higher than a mortgage, but vary over time based on federal funds rate so could come down. I'm not sure about a home equity loan, but these don't seem very common in my experience.
Heloc's will still go off of your Debt to income ratio. They're great if you want to expand your investment portfolio. You tap into dead equity in your home to buy assets that could cash flow from day one.
However, buying an investment property under conventional investment loans will still use your income to qualify. You could always go DSCR where they don't look at your income, they look at the properties ability to produce income. They will look at your credit and you'll have to show proof of assets for the purchase.