HELOC BANKS RECOMMENDATION

[Salvador Figueroa]

So I have over 200k in equity and I am thinking about taking 120K HELOC to do a BRRRR. I know a lot of banks offer HELOC's but is there any of them that you recommend? Have you been working with a lender in LA COUNTY for a very long time? What are some things that I should consider before I start interviewing lenders?

[Scott Elliott]

I’m not from the area so I don’t have a good lender to recommend but wanted to share an overview of HELOCs so that you can ask some important questions to the banks/institutions that you contact.

First up, I wanted to congratulate you on being in a position to access sizable equity in your home for future investments. In my opinion the HELOC is an amazing tool that allows you to make cash offers on properties and self-finance rehabs possibly making good deals GREAT deals! I also use my HELOC for this purpose.

As I'm sure you know, the HELOC is an open-ended revolving line of credit allowing you borrow from your home's equity and only pay interest on outstanding balances. However, a HELOC from one institution to another can be very different.

1. In general, here are the areas of HELOC that will typically differ from lender to lender:
2. 1) Closing Costs - there are a lot of lenders that will not have application fees or closing costs for HELOCs.  It’s actually not too difficult to find a lender willing to pay for their own valuations/appraisals so long as you agree to keep the line open for X amount of years (I typically see 3 years as the norm).
3. 2) Annual fee - because banks are willing to cover the costs of setting up the HELOC, you'll commonly see an annual fee, too. Here in Missouri the maximum they can charge is $50 and I see this just about everywhere for those institutions that don't charge the upfront closing costs.
4. 3) Combined-Loan-To-Value - most banks will have a maximum Combined-Loan-to-Value (balance of all debts/limits on the home divided by the home's appraised value) of 75%-80% but you can find lenders willing to go out to as high as 90% CLTV. The rate may be a bit higher to get access to that extra 10% but for the purposes that you've stated that rate is better than a private lender or other revolving alternatives.
5. 4) Terms - possibly the most important factor that differs greatly from bank to bank. It might sound strange but for an investor looking to use their HELOC of short-to-mid-term financing (ie: BRRRRing and knowing that you'll plan to payoff the loan balance as soon as you refinance the investment property) the interest rate might be the least important factor. This is because the HELOC's minimum payment typically breaks down as all interest accrued on the outstanding balance over the last month + a defined portion of the principal + any fees. That "defined portion of the principal" could be based on a 10 year amortization (1/120 * the balance) or 30 year amortization (1/360 * the balance) or anything the lender sets up. As you can imagine, the minimum payment then could vary greatly if your paying 1/120 of $100,000 ($833.33 + accumulated interest) or 1/360 ($277.78 + accumulate interest).

Now this might be a bit of a simplification as there are still other things to consider like availability/efficiency of drawing funds, interest only options, fixed rate lock availability, the draw period/time that the bank gives you to draw on the line,etc.  But these are the big ones that I think greatly differentiate HELOCs from each other when being used for investment purposes.  Good luck!