A HELOC to refinance another HELOC ??

Question

I got a HELOC on my primary residence for 350k in 2021. The home had over 1.5 million in equity at the time but that was all they would offer. I used it to purchase an off market deal and am about to refinance to pay it off and pull out equity (550K total).
A friend of mine suggested a program that could use the full equity of my primary (now over 2 million) to get what sounds like ANOTHER HELOC on my primary instead of refinancing then paying off the first HELOC . It made no sense to me. I’ve never heard of it but he says lots of investors do it. Can someone clarify what he may be talking about so I can research? It sounds like the only way I can use my equity (family home, don’t want to sell or refinance). Thank you!

Andrew West · Answer

My (very limited) experience lines up with what @Scott E. said.

As the value of my primary residence has continued going up, I've now closed HELOCs on it THREE different times. But that doesn't mean I have 3 HELOCs at once. Each time I work with my bank to get a new HELOC at a higher amount, it takes the place of the old one and assumes it's balance, however I now have more to draw from to continue investing. So your friend is correct in that you can get a new HELOC to pay off the old one, but that doesn't mean the balance just magically disappears. You're just using new debt to pay off old debt (which is the same concept as your alternative: refinancing your primary to pay off the HELOC). It's really just a question of how you want your debt structured: In a HELOC or in a mortgage? In my case, I wanted to keep my mortgage payment low, so I decided not to do a cash-out refinance and instead opt. for the HELOC.

Either way, it sounds like you have some great equity to leverage to achieve your goals. Good luck!

Scott E. · Answer

Sounds like you don't have a traditional 1st mortgage on your primary residence, you just have a 1st position HELOC. It's not likely your friend was saying that you would get another HELOC to go in 2nd position (banks don't like to do a HELOC behind another HELOC).

My guess is he's saying you get another HELOC with a larger available balance, and use that HELOC to payoff whatever is remaining on your existing HELOC. (example you take out a $1M HELOC, pay off your old $350k balance, and now you have a new HELOC with a $350k balance but an additional $650k to draw from)

Above poster is incorrect on 2 things.

1. HELOCs do not have balloon payments anymore. They will go "fully amortized" after 10 years meaning your draw period ends and you go back into repayment mode. But you won't have a balloon due.

2. Banks do not regularly freeze lines of credit. They did this back in ~2009 and haven't widely done it since (not even during the pandemic)

Greg Scott · Answer

A HELOC is best used as a short-term debt instrument.  Using it like long-term debt can be bad for your financial health.

First, the HELOC impacts your DTI the moment is created, not the moment you draw down on it.  Second, the HELOC has a balloon payment, typically every 5 or 10 years.  Finally, a HELOC can be withdrawn at a moments notice by your bank.  They can't force you to accelerate payments, but they can say "no more" and cancel any further draw-downs.  Banks do this regularly during any kind of financial hiccup.  Imagine we reach a time where interest rates are higher so it is harder to get qualified, your HELOC balloon is coming due and they will not renew.

I'd put in place some permanent financing on you long-term holdings.

Dave Skow · Answer

@Amy Konopka- 1) you might   ask  present heloc  lender if they can  offer a  new / larger  line ...2) assuming they cant - getting a new  heloc to payoff / replace an  exisiting heloc  should be  fine  assuming you qualify for one     3) many lenders  have  max  limits  on the heloc amt  - often  250k 350K  500K etc ......4) most  heloc lenders  will use a  CLTV  ( combined loan to  value ) max of  85-90% of value  ..thus getting a  huge heloc for all of your  equity isnt  ikely to happen

German E. · Answer

@Gregg Scott I believe it is incorrect to say that income from a heloc is never tax deductible.  If you take a loan out that is specifically used for a business expense, such as paying for a rental property down payment or rental repair, then the interest paid for the loan is generally tax deductible, regardless of the source.  I researched this at length before using a heloc to pay for a rental down payment.  Scott provided a reference where it said that heloc interest was not tax deductible - this is because an old law allowed to deduct interest from a heloc regardless of its use, and this law was changed a few years back.   But all the discussion in that reference is for residential, non-business expenses.  The business use of the loan remains as before.

Andrew West · Answer

Great input, @Greg Scott and thanks for linking those articles.

I honestly hadn't even considered HELOC interest deductions, and it's not surprising that the IRS & banks have strict guidelines around this to protect themselves. Not being able to deduct interest on my HELOCs is nowhere near a make-or-break for my investing strategy. Interest is the cost of borrowing money and, as the article says: “As long as you’re making that money work for you—for instance investing in other property—and your rate of return is greater than your cost of the HELOC, it’s a good tool”

I am paying roughly 4.5% to borrow money on a HELOC that is making me a minimum of 20% on my investments.

Greg Scott · Answer

@Scott E.  I had not heard that HELOCs would automatically convert so that would be new news.  In researching this, it appears that the auto-conversion may be on a bank-by-bank basis, and would depend on the HELOC product you have chosen.  I could not find any indication this is law, and I'm still finding recently-written articles about what to do when your HELOC balloon payment comes due. https://www.lendingtree.com/ho... Is it your understanding that all HELOCs must convert and can you cite a source?

@Andrew West  Just be wary that one key downside of mulitple HELOCs used for investing is the IRS prohibits you from deducting the HELOC interest payments. https://www.realtor.com/advice... In other words, you might be better off doing a cash-out refi and paying off the HELOC.

A HELOC to refinance another HELOC ??

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