Considering HELOC or Home Equity Loan at High %LTV

[Matt Anderson]

Hey BP, I recently started a discussion called "Looking for feedback on my next move", and have since been giving more thought to obtaining a HELOC or Home Equity Loan as my "no or low money strategy".

Here is the scenario: I had my realtor run an analysis of some local comps, and she believes my primary would appraise at $272K, and my loan balance is about $226K, so equity = 272-226 = $46K (approximately). That's only ~17% equity, which in most cases seems to be not enough to obtain either of these products. I have, however, done some casual searching online for local credit unions, and have found at least a small handful that will lend higher than 85% LTV (with less favorable terms, obviously). So I am confident that this is an option (but am open to feedback confirming or rebutting).

First question: Is this something I really want to do (from a risk/exposure perspective)? Most conventional wisdom/lessons learned are to the tune of not over leveraging, and any discussion involving >80% LTV seems to create a sense of nervousness (I am making a generalization here). What I am not sure I am clear on is, if I believe that my W-2 income can support the payback of a HELOC or home equity loan, and I use the funds from that loan to buy a cash-flowing property below market value, what are the risks of going this route? There are certain answers I expect to hear, but want to leave the question open-ended to see what else comes up that I may not be thinking about. At the end of the day, my big question here is: why would I care that my LTV is 90-100%?

Second question: Most of what I am reading in the forums (again, a bit of a generalization) seems to favor HELOCs over Home Equity Loans, mostly for the flexibility that a HELOC offers since you can tap into the money whenever you want. However, if my intention is to use the equity from said HELOC/Home Equity Loan as a down payment on a rental, doesn't it make more sense to take a fixed rate Home Equity Loan so I am not subject to the adjustable rates of a HELOC? Or is there an inference made that with the HELOC, once you tap into it in a situation like this, it is assumed that you refinance it into a fixed rate loan so you know exactly what you're dealing with month-to-month? I believe that HELOCs can be interest only for a period of time, which can help with cash flow for sure, but can home equity loans ever be interest only?

What other details of the strategy I have outlined here am I overlooking?