Line of credit vs. hard money: which is better?

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Line of credit vs. hard money: which is better?

Tim Ball
Flipper/Rehabber · Carrollton, TX · Member since 2013 · 165 posts · 71 votes

I am very familiar with hard money but I am not certain exactly how lines of credit are set up.  If you are able to secure a line of credit, and you are looking to purchase buy-and-hold properties, would that be a better route than using hard money?  I know hard money is more expensive but how do credit lines work? If I bought a house on a line of credit, how long is the life of the loan?  Can I pay it off early?  Can I refi out of a line of credit purchase to a conventional mortgage on the house?  I am looking to start buying rentals and was wondering what would be the better route and why?  Let me know please.  Thank you.

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Marcia Maynard
Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes
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My understanding is that hard money loans are secured loans and are more expensive because of risk factors and the short term nature of the loan. They are often used for flips, but not as suited for buy-and-hold. @Jay Hinrichs may have some insight on that.

We maintain a $100K HELOC at our local credit union, secured by our primary residence. The annual fee is $25. Our terms are 3.25% (adjustable, but it has stayed at the same rate since we opened it over 10 years ago). We can borrow on it, at will, for any reason. When we draw on it, we pay interest only. We use it for short-term needs only.

In March of this year we pulled $100K from our HELOC to make an all cash purchase on a SFR. After we finish the rehab, we will seek financing on the ARV of the property, probably via a conventional loan. Then we will pay off the HELOC loan. Rinse and repeat.

You can find general information on line about HELOCs and HMLs that may be helpful. [My previous post was removed, perhaps because I included links to wikipedia about those. Sorry.]

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  • Challenor Jack
    Investor · Morton Grove, IL · Member since 2014 · 26 posts · 14 votes
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    I have to agree with Marcia. Line of credit will work much better for you. 

    2Reply
  • Marcia Maynard
    Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes
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    My understanding is that hard money loans are secured loans and are more expensive because of risk factors and the short term nature of the loan. They are often used for flips, but not as suited for buy-and-hold. @Jay Hinrichs may have some insight on that.

    We maintain a $100K HELOC at our local credit union, secured by our primary residence. The annual fee is $25. Our terms are 3.25% (adjustable, but it has stayed at the same rate since we opened it over 10 years ago). We can borrow on it, at will, for any reason. When we draw on it, we pay interest only. We use it for short-term needs only.

    In March of this year we pulled $100K from our HELOC to make an all cash purchase on a SFR. After we finish the rehab, we will seek financing on the ARV of the property, probably via a conventional loan. Then we will pay off the HELOC loan. Rinse and repeat.

    You can find general information on line about HELOCs and HMLs that may be helpful. [My previous post was removed, perhaps because I included links to wikipedia about those. Sorry.]

    4Reply
  • Michael BarbariPro Member
    Banker · Downers Grove, IL · Member since 2014 · 396 posts · 107 votes
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    @Tim Ball

    Most helocs are 10 year open lines then a 20 year fixed mortgage after that. You have the option to refinance it after the 10 years to keep it open. The rates are tied to prime which currently is 3.25%. They are free and have a small annual fee. Great for investors. I do a large number of these for the bank I work for.

    1Reply
  • Darren Eady
    Rental Property Investor · Lindon, UT · Member since 2015 · 862 posts · 438 votes
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    If you have equity in your home and a lower interest rate and better term than hard money, always go that route.

    1Reply
  • Account Closed
    Professional · Jacksonville, FL · Member since 2015 · 397 posts · 34 votes
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    Originally posted by @Tim Ball:

    I am very familiar with hard money but I am not certain exactly how lines of credit are set up.  If you are able to secure a line of credit, and you are looking to purchase buy-and-hold properties, would that be a better route than using hard money?  I know hard money is more expensive but how do credit lines work? If I bought a house on a line of credit, how long is the life of the loan?  Can I pay it off early?  Can I refi out of a line of credit purchase to a conventional mortgage on the house?  I am looking to start buying rentals and was wondering what would be the better route and why?  Let me know please.  Thank you.

    You want to talk to a bank regarding what line of credit products they have, the limit and your intentions (how you plan to use the line). You don't want to have the line tampered with in the middle of a rehab project.

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  • Account Closed
    Professional · Jacksonville, FL · Member since 2015 · 397 posts · 34 votes
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    Originally posted by @Marcia Maynard:

    My understanding is that hard money loans are secured loans and are more expensive because of risk factors and the short term nature of the loan. They are often used for flips, but not as suited for buy-and-hold. @Jay Hinrichs may have some insight on that.

    We maintain a $100K HELOC at our local credit union, secured by our primary residence. The annual fee is $25. Our terms are 3.25% (adjustable, but it has stayed at the same rate since we opened it over 10 years ago). We can borrow on it, at will, for any reason. When we draw on it, we pay interest only. We use it for short-term needs only.

    In March of this year we pulled $100K from our HELOC to make an all cash purchase on a SFR. After we finish the rehab, we will seek financing on the ARV of the property, probably via a conventional loan. Then we will pay off the HELOC loan. Rinse and repeat.

    You can find general information on line about HELOCs and HMLs that may be helpful. [My previous post was removed, perhaps because I included links to wikipedia about those. Sorry.]

    Regarding HMLs being secured loans (and they typically are), the HELOC is still technically 'secured' by the home -- your primary residence. Most banks do however offer other types of lines of credit that may be unsecured -- such a business line of credit. The exact features and terms may vary based on the type of line and from bank to bank.

    1Reply
  • Chris Julian
    Jacksonville Beach, FL · Member since 2015 · 6 posts · 3 votes
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    Line of credit seems the most appropriate for your needs. The rates are variable, so the longer you hold a balance the more exposure you'll have, but rates are very attractive right now so the associated risk levels are nominal at best. (Although, the low rate environment we're in is surely going to run it's course soon.) Also, you're not on the hook for anything, in terms of debt servicing, until you borrow against your credit allotment. Unlike a conventional REFI where you're paying out right away. My only advice, be sure to create and stick to an aggressive payout model. I know some who finance deals this way, stuff the debt in their back pocket, and then wonder why they aren't clearing the profit they thought they would upon sale. 

    1Reply
  • Tim Ball
    OP
    Flipper/Rehabber · Carrollton, TX · Member since 2013 · 165 posts · 71 votes
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    Great info everyone!!! I currently bank with Chase.  Should I stick with the big banks for a line of credit or go with a credit union or smaller  bank?  Or does it really matter? Thanks again for all ya'lls help.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Tim Ball

    small local community bank that understands your business and who you can sit down and eye ball will give you the best chance at a Unsecured LOC

    I have a significant one with my local bank and a smaller one with Chase  ( WAMU) really shocked they never called it.. I rarely use it.. but keep it there for a rainy day.. since they don't charge me and have not called it.

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  • Account Closed
    Santa Clarita, CA · Member since 2014 · 40 posts · 25 votes
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    Originally posted by @Account Closed:
    Originally posted by @Marcia Maynard:

    My understanding is that hard money loans are secured loans and are more expensive because of risk factors and the short term nature of the loan. They are often used for flips, but not as suited for buy-and-hold. @Jay Hinrichs may have some insight on that.

    We maintain a $100K HELOC at our local credit union, secured by our primary residence. The annual fee is $25. Our terms are 3.25% (adjustable, but it has stayed at the same rate since we opened it over 10 years ago). We can borrow on it, at will, for any reason. When we draw on it, we pay interest only. We use it for short-term needs only.

    In March of this year we pulled $100K from our HELOC to make an all cash purchase on a SFR. After we finish the rehab, we will seek financing on the ARV of the property, probably via a conventional loan. Then we will pay off the HELOC loan. Rinse and repeat.

    You can find general information on line about HELOCs and HMLs that may be helpful. [My previous post was removed, perhaps because I included links to wikipedia about those. Sorry.]

    Regarding HMLs being secured loans (and they typically are), the HELOC is still technically 'secured' by the home -- your primary residence. Most banks do however offer other types of lines of credit that may be unsecured -- such a business line of credit. The exact features and terms may vary based on the type of line and from bank to bank.

     Just to clarify....the hard money loan is secured by what? The property which it was taken out for?

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Account Closed

    YUP just like any other debt instrument or loan.. HML just refers to higher interest rates and origination than a conventional bank loan.

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  • Account Closed
    Santa Clarita, CA · Member since 2014 · 40 posts · 25 votes
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    Originally posted by @Jay Hinrichs:

    @Account Closed

    YUP just like any other debt instrument or loan.. HML just refers to higher interest rates and origination than a conventional bank loan.

     Hey, thanks for clarifying that. 

    When I read that it was a secured loan in the first few posts I was like "huh??" That is kind of the whole point of HM....financing for people without it...but then I remembered the liens lol. 

    0Reply
  • Account Closed
    Investor · Downers Grove, IL · Member since 2015 · 135 posts · 55 votes
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    @Tim Ball

    One thing that I wasn't clear on from your post is are you asking about a business line of credit?  Or a home equity line of credit as many others in the thread referred to? Or something else?

    1Reply
  • Tim Ball
    OP
    Flipper/Rehabber · Carrollton, TX · Member since 2013 · 165 posts · 71 votes
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    Good point Geoff. I am not really sure what I am referring to. Which is better? Is a business line of credit based on how much you have in the bank and a HELOC is based off the equity in your home? Let me know your thoughts. By the way, while you are at it, can someone tell me how to do the @Whoever I am talking to, so they are notified?

    0Reply
  • Chris Julian
    Jacksonville Beach, FL · Member since 2015 · 6 posts · 3 votes
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    I would say stay with the bank you have your current mortgage with. Probably won't get any deals, but the process may be streamlined and easier on you. If you're doing for a conventional refi, I would say shop around. 

    0Reply
  • Account Closed
    Investor · Downers Grove, IL · Member since 2015 · 135 posts · 55 votes
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    @Tim Ball

    Re the mentions functionality - type @ followed by a few letters of the person's name you want to mention and their name should appear below the text box you are posting your reply in.  I will admit it doesn't always work that well for me.

    Re defining lines of credit. Business line of credit = a line of credit in a business's name. So, you would need to have a company formed (e.g., LLC, S corp, C corp, etc.). In the event that the company is less than a year old and absent additional collateral (other real estate, etc.) you will likely not be able to get more that $100K in a line of credit for the business and your ability to do so will largely depend on your personal credit.

    A home equity line of credit is, like you said, a line of credit that's secured by the equity inf your personal residence and allows you to borrow against that equity.

    Hope that's helpful. 

    1Reply
  • Stephen Bianes
    Rental Property Investor · Austin, TX · Member since 2015 · 45 posts · 27 votes
    6y
    Originally posted by @Marcia Maynard:

    My understanding is that hard money loans are secured loans and are more expensive because of risk factors and the short term nature of the loan. They are often used for flips, but not as suited for buy-and-hold. @Jay Hinrichs may have some insight on that.

    We maintain a $100K HELOC at our local credit union, secured by our primary residence. The annual fee is $25. Our terms are 3.25% (adjustable, but it has stayed at the same rate since we opened it over 10 years ago). We can borrow on it, at will, for any reason. When we draw on it, we pay interest only. We use it for short-term needs only.

    In March of this year we pulled $100K from our HELOC to make an all cash purchase on a SFR. After we finish the rehab, we will seek financing on the ARV of the property, probably via a conventional loan. Then we will pay off the HELOC loan. Rinse and repeat.

    You can find general information on line about HELOCs and HMLs that may be helpful. [My previous post was removed, perhaps because I included links to wikipedia about those. Sorry.]

    What was your monthly payment on the HELOC? My heloc requires me to pay$14 per $1,000 draw, how about you? The reason I'm asking is I want to see if we can get a better deal with a HARD MONEY LENDER.

    0Reply
  • Lance Ayar
    Member since 2019 · 6 posts · 3 votes
    3y

    Hello everyone, 
    I realize this thread is old as Odin's left eye... but since I'm currently on the same boat and did a quick search on the matter to be able to make a better decision, this page popped up, and I'm glad it did!

    First off; my HELOC is very straight forward! No monthly or annual fees, as well as no early payment penalties etc. Int. rate is at 7.5% as of today (02/12/2023).

    I'm also qualified for HM loan for the property I'm about to close on in about 10 days from now. 

    I'm able to purchase the property in full with the HELOC without any hassle whatsoever! So, 'why the HM loan?' you ask? Great question!

    I merely wanted to establish a rapport with this specific lender... and even though they have fees and high int. rate that's going to cost me a pretty penny, I think I'm going to go this route for simply the future deals! Because once a good relationship is established with a lender, their requirements, fees and rates become way more reasonable! You also never know what the future holds! If ever you come across a deal and you seem to lack the means to pull the trigger on it, this can be a deal saver at a time like that! And since the property I'm about to acquire is not a gigantic deal ($50K for the property and roughly $30K for rehab with an ARV of minimum $120K), I felt more comfortable paying the lenders somewhat high fees!

    I intend to hold the property for long term, however, my exit strategies are;
    1.flip, once completed!
    2. pay off HM loan with HELOC
    3. refinance and pay off HM loan

    In any case, I feel good about it... but still wanted to run it by you wonderful people for some insight. Even though I've been in this game for nearly 2 decades, that doesn't mean I know everything and I don't value others opinions! 

    I thank you in advance and hope the person started this thread have had a great experience with their choice. 
    Cheers,
    Lance

    1Reply
  • Hope McGrath
    Real Estate Agent · Brooklyn, NY · Member since 2022 · 4 posts · 1 vote
    3y
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  • Kevin Wann
    Member since 2022 · 12 posts · 10 votes
    3y

    I am in the same spot. I have 4 properties that I bought in 2 months. I have about $300k in my house (it's paid for) for a HELOC. We want to buy 24 properties this year. We are planning on using the HELOC as down payments for many properties & using DSCR loans. We have a hard money lender at 10% & no fees. This will allow us to scale up really big without over leveraging. The properties will pay the HELOC monthly & the refinance in 6 months paying off the balance of each. Repeat. Does this sound like a good plan? Any info would be great.

    1Reply
  • Eliott Elias
    Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
    3y

    Credit lines usually don't have a maturity date and have a lower interest rate. The collateral is larger. 

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    3y
    Quote from @Kevin Wann:

    I am in the same spot. I have 4 properties that I bought in 2 months. I have about $300k in my house (it's paid for) for a HELOC. We want to buy 24 properties this year. We are planning on using the HELOC as down payments for many properties & using DSCR loans. We have a hard money lender at 10% & no fees. This will allow us to scale up really big without over leveraging. The properties will pay the HELOC monthly & the refinance in 6 months paying off the balance of each. Repeat. Does this sound like a good plan? Any info would be great.


    read fine print of heloc.. most helocs can be called or frozen ( locked) unilaterally by the lender.. so do read the fine print and figure what would happen in you plan if you could not access the heloc ?
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  • Kevin Wann
    Member since 2022 · 12 posts · 10 votes
    3y

    Jay, thank you very much, I will do that. My plan is only use 50-70% of HELOC so as not to over leverage. Then use HM for bigger deals.

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