HELOC or Conventional Financing?

Question

Hi BP,

I am looking to get my feet with an SF investment property this year and have a few questions about getting financing from the bank.

Question 1. I own my primary residence free and clear and it is worth $75,000. Would it be smarter for me to go to the bank and get approved for a HELOC or get pre-approved for conventional financing? With the HELOC I could probably leverage 100% of my rental purchase however I’m not sure how interest rates and terms compare between the two.

Question 2. Should I try to get pre-approved ahead of time or wait until I have a deal that I can present? It seems silly to wait until I find a deal, however I have heard that banks would rather see examples instead of hear plans.

Question 3. Are there any other pointers you can give me for when I call and visit the bank? Questions to ask, documents to bring, etc. I'm brand new!

Thanks for your help!

Tim Chasteen

Tim C. · Answer

Thanks Pat!

What kind of tax benefits does a HELOC offer over traditional financing? When you say that you can't sell the property, is that only if the principle hasn't been paid back?

I'd love advice on whom to consider!

Tim

Pat Kumparatana · Answer

Hi TJ,

I would say a HELOC is definitely the best and most efficient way financially versus conventional financing.

I work at a bank and usually would recommend HELOCs for investments and financing or refinancing to consolidate debt.

The pros of a HELOC:

Line of credit up to 90%(depending on what bank used) LTV

10 year interest only 20 year payback period

If you pay principle down you can draw on the line as much as you want

Low interest rates

Tax benefit

Can be refinanced

no money out of pocket

The cons of a HELOC

Banks may charge 1 time annual fee

cannot sell property for 2-3 years (depending on bank) otherwise its subject to fees

Pain to establish (mortgage brokers dont want to do this because they dont get paid much)

Just as Joe mentioned, if you prepare all the documents in advanced, banks can give you their preapproval package within 2-3 business days.

Please let me know if you need any advice on whom to consider, I have a HELOC myself and did HELOCs for clients often

Best of luck!

Pat

Tim C. · Answer

Thanks Mike,

You bring up a great point on being able to refinance to a traditional mortgage any time down road. Using a HELOC will also allow me to pull out the money I need for rehab without going through tedious paperwork. I guess the next step is to start talking to the banks!

TJ

Mike Cowper · Answer

Tim,

I realize I'm a little late to the game on this one but I would recommend using the HELOC route on your primary. The reason I say this is that a cash offer brings much more negotiating power to you when making an offer and can often times get you a better price. Also, most HELOC are 10 year interest only, so that means you would be able to maximize your cash flow and it would give you a little more margin for error. Also, after purchasing with the HELOC you can always do a refinance down the road and put a traditional mortgage on the property.

Hope that helps - feel free to reach out for anything else.

Tim C. · Answer

Thanks Joe,

That's a good point about the HELOC, but it doesn't concern me much because I have a pretty strong emergency fund. I appreciate your heads up on all the documents needed for conventional financing, defiantly sounds like a bit of work!

Best,TJ

Joe Mulcahy · Answer

Good questions Tim!  I just bought my first rental and I used conventional financing. It was the easily and the hardest.  I went through a guy my real estate agent suggested. He was ok except that towards the end when we were going to settlement I felt like he dropped the ball and I was running around emailing documents and it got crazy but it turned out ok. If you have an agent, ask them who they suggest.  I got prequalified before I purchased the property. I don't think that meant too much as I still had to run around a lot toward the end where I thought that since I was prequalified I was good to go.  But being your first house you might go that route. Also you will probably need 20% down and 5-8% for closing. With a HELOC you don't need money down but don't forget your house is the collateral If you don't pay the mortgage on your rental the bank can foreclose on your house.  As far as documents go get 2 years of fed taxes, 2 months of pay stubs, your pay off mortgage note, 4 months of bank statements.  Prepare to explain where your down payment came from. I bought my primay house back in 95 and there is a lot more paperwork nowadays.  Good luck!