How to use HELOC to Finance a Purchase

[Robert Chaiton]

Hello everyone! I've been trying to figure this out on my own for a few days now and can seems to figure it out so I'll ask some experts on bigger pockets. I am trying to figure out the HELOC works as a financial instrument, since the HELOC interest rate is variable not fixed what is the variable benchmarked to within the market and how volatile is this rate usually? Also when using the HELOC to purchase a property, how quickly would I be able to refinance this house in order to pay back my HELOC with the homeowner’s equity loan I can take out of the property? I am asking these because I am trying to convince my father that I can reduce his overall debt and get him closer to retirement by leveraging out full owned 100% equity in our vacation property. I want to make sure I fully understand how the HELOC terms work when barrowing from it and how fast I will be able to refinance out of my father’s HELOC thus repaying the total HELOC owed on our vacation property and now leveraging the LTV needed on my investment property. I will then use the cash flow from my investment property to hammer down my father’s overall debt. I know I asked a lot here, if you could clear up any of this that would be amazing Thanks for Reading Bobby Chaiton

[Kyle J.]

@Robert Chaiton The variable interest rate on HELOCs is usually tied to the Prime Rate. For example, a bank may quote their rate on a HELOC as Prime + 1%.

The Prime Rate is currently 3.5% and it's been that way since December of 2015.  However, prior to that, it had been 3.25% since December of 2008.  So I'd say it's been pretty stable, but you can easily look up the historical Prime Rate and see for yourself how it's changed over time.

If you purchase a property using a HELOC on another property, it's possible to do a cash-out refi right away (within the first 6 months) using the Delayed Financing Exception. You can read more about that, and other options, here: https://www.biggerpockets.com/blogs/5110/46871-buy-rent-rehab-refinance-cash-out-refinance-delayed-financing

Or another option would be to do as @Jason McKinley suggested and do the cash-out refi on the paid off property you already own and use those funds to just purchase the new property outright. 

You didn't post specific numbers, so I can't give you specific examples of what might work the best.  But I hope that helps clear up some of your questions.  Good luck.