Creative HELOC Strategies

[Christopher Morris]

Hello BP! 

I am trying to plan the future for myself and would like to "diversify" by investing in a smaller market that has decent appreciation and decent cash flow (Northampton County PA).

 I currently own one duplex in an expensive market in NJ but this PA market has multi family listings for 200-500k which is what has piqued my interest. I plan on buying one more in NJ before I take the lower priced PA option, but I am anticipating liquidity being tighter at that point. 

If my cash flow from the first two properties could help pay a HELOC down short term (pay off would hopefully be 1-2 years), does it make sense to use a HELOC as a down payment?

It's my understanding HELOCs should only be used when they can be paid off quickly. 

BP let me know your thoughts! 

[Jason Wray]

Christopher,

Helocs have changed over the years because you could get a Heloc with a rate in the low 3-4% which made the payment affordable. Fast forward to today and Heloc rates are in the 9% or higher depending on Heloc amount, CLTV, Credit, Property type, and terms. A Heloc is a good tool for doing renovations and repairs.

When it comes to down payments on more investment properties a Heloc is not the best choice. A cash out refinance is the better choice for a few reasons including lower rates, longer term (30 year vs Heloc shorter term) equals a lower payment. You also cannot use a Heloc as a verifiable asset or PITI reserves that are required when buying more properties.

A Heloc is always going to be in 2nd lien position and you cannot borrow more money unless the heloc is paid off. A cash out refinance lets you pull cash out to put into your checking or savings as a verifiable asset or PITI reserves. Heloc is the same as a credit cards its a open end mortgage and it adds another trade line to your credit. Excessive trade lines on credit can drop or hurt your credit score and raise your DTI.

I would encourage you to look at a side by side to examine the savings and benefits of a Cash out refinance payment versus a Heloc payment.