Using a HELOC/Home Equity Loan for down payment

[Blake Wilson]

I am in the process of talking to banks about taking out a HELOC or Home Equity Loan on my residence which I plan to use for a down payment on a first rental property. I am having trouble wrapping my head around a couple of things:

1) When using as a down payment is one of these options better than the other (HELOC vs Home Equity Loan)? Or is it one of those things where both have pro's and con's and I just have to make sure the numbers work.

2) What I'm thinking is that I would use the money from the equity financing for the down payment and then eventually refinancing with a conventional loan to cash and pay off the draw I used towards the down payment so I can use it on another property. Is this a common strategy? What throws me off is that I see people in the forums that just keep the HELOC money in a property. With a variable APR and higher interest than a conventional loan it seems like you would want to pay that back as soon as you can right?

[Andrew Kougl]

@Joseph Medina

Also be aware of fees. Cash out refinance is a new loan with all the fees that come with it. You are going to then turn around and take that equity to purchase a rental (using the equity as a downpayment) and have another round of loan fees. Double whammy.

I prefer a HELOC, because it gives you flexibility and is a fraction of the fees. I've never purchased something that didn't have a repair needed a couple months in and having a HELOC is nice for those small unforeseen expenses. And you only pay interest on the portion of the HELOC you currently use.

Be aware of your debt utilization, making sure you aren't maxing out the HELOC because it will affect your credit score if your overall credit utilization is high but the flip side of that is taking out a larger then needed HELOC will impact your DTI as lenders will calculate your DTI with the assumption you've maxed out your HELOC. My opinion though is the second option is better.

The "HELOC to purchase a rental" is how I started and it turns your primary house into an asset.