What to look for in HELOC terms

Question

Hi All,

I'm planning on getting a HELOC against my primary residence to help finance the purchase and rehab of investment properties.  My first draw will be for a flip, the second will be for a buy and hold rental property (to refinance at a later date).  I've just started to get quotes from various banks and it seems aside from the rate itself, the terms and conditions vary quite a bit from place to place.  I was wondering if I could get some advice as far as the primary things I should be paying attention to in the terms.

Many thanks for your input!

Josh Lee · Answer

So glad I asked, I never would have thought about some of the important things mentioned here.  Thanks all for your advice!

Steve Babiak · Answer

More info here:

https://www.biggerpockets.com/forums/48/topics/854...

Now, some lenders will force you to take an initial draw when you open the HELOC, so you start paying interest immediately; you may or may not want that.

As others posted, the draw and amortization periods will also vary among lenders. Shop around until you find one you like.

Josh Lee · Answer

@Scott VanHee

thanks this is great to be aware of, I hadn't heard of this before and will be sure to find out!

Scott VanHee · Answer

@Josh Lee As you compare the typical variables (rate, fees, term, etc.) I would caution you to know the fine print, specifically, is the lender extending you a commitment or not.  In 2009, I was working with someone who came in one day and said that his large, national bank sent him a letter notifying him that his HELOC had been cancelled.  Notice that the letter said it had already been cancelled - it didn't advise him it was being cancelled in X days.  He didn't have anything funded on it and when the crap hit the fan, that large, national bank (along with many others) had balance sheet issues.  One way some of the banks fixed their balance sheet was to cancel uncommitted facilities that were unfunded.

A lot of people who were looking simply for 'cheap' money, got the cheap money, but never fully understood that the lender actually made no commitment to lend.  Typically a commitment costs a little more vs. an uncommitted facility.  So, when you're comparing Lender A vs. Lender B, don't only look at the rate and fees... look to see why there's a difference.  Whether it's b/c 1 has a longer I/O period or a longer amortization period or higher LTV or.... 1 is a commitment and the other isn't.

Josh Lee · Answer

Thanks all, I really appreciate you letting me know what to look out for.  I'll start making some calls and be sure to ask about those terms you mentioned.

Sam Craven · Answer

When i was getting a HELOC to start our company i went to a regional bank and was able to get a 30 year amort on 10 year loan.

Go local/regional and you will find more banks that will want to earn your business.

Joshua Springer · Answer

A lot of the banks around here do a 10 year baloon, interest only payments.  Usually have some kind of application fee and about half of them run an annual fee as well.  Some banks are starting to turn the baloon into a full amortized mortgage as well.

I'd be looking for rate terms: typically prime +- a number

Look for floor/ceiling rate. for instance right now if it was prime + 0% you would be at 3.25% but if the floor rate was 4% you would be at 4%.

annual fee's/closing fee's

LTV(usually anywhere from 60-100%...most are around 85-90%)

Casey Miles · Answer

30 year am on my helocs too. It's the bank I mentioned before in our messages.

Josh Lee · Answer

@Jeff Trevarthen

Of all the banks I've looked at I've only seen a 20 year amortization period.  Can you tell me which bank is offering those terms?

Jeff Trevarthen · Answer

Usually it's a 10 year draw period amortized over 30 years.  Mine is currently structured so that I pay interest only payments until that 10 year mark after which it becomes fully amortizing.