Would you consider a Principal + Interest HELOC?

Question

Hi everyone,

I'm trying to make a final decision on a HELOC lender in the next day or so here. A local credit union has an option to go up to 100% LTV (up to a $400,000 limit), but hey require you to pay 1% of the balance of the account (principal and interest) at the end of each month. They have a 10 year draw period and a 10 year repayment period, so they require people to pay principal to keep the balance from ballooning at the end of the 10 year draw period.

For those with experience leveraging their HELOCs to buy investment properties, would you ever consider a HELOC that wasn't interest only during the draw period? Seems like there would be seasons when interest only payments might be helpful as you are building cash flow. I'm trying to find a lender with the best terms that can provide me with the maximum credit limit, but am not sure if it's smart to go with a lender that doesn't offer an interest only option.

Thanks, everyone!

Ryan

Dean Klein · Answer

I have two HELOCs from a local bank and my monthly payment is 1% of the balance (P+I). These HELOCs are on rental properties. I looked around and didn't have much luck finding lenders that would do HELOCs on investment properties. I wasn't a fan of the higher payment myself, but I was happy to just have the HELOCs.

Kerry Baird · Answer

A number of people have posted that they are seeking a lender who will do a 90% HELOC, so one that offers 100% is unusual. I personally like interest only loans for the initial period that I'm getting a house set up, and then refinance to a P&I later. I am buying STRs right now for context, and have a number of long term rentals as well. I wasn't sure if the STR location I chose was a good one and wanted the flexibility of IO payments. That said, the interest in an investment is deductible, while the interest on a HELOC that is used for other purposes is, as I understand it, not deductible.

Can the investment purpose for which you seek the HELOC make enough money to pay said HELOC off? It ought to. You could bank the funds (excess rents) in an account that you set to the side for this purpose. Or use several properties to do the "debt snowball" and knock it out quickly. Check out Profit First for Real Estate Investors for a more robust description of the accounts.

Scott E. · Answer

Interest only HELOCs have become less common in recent years. I'd be surprised to hear if you found many lenders still willing to do one for you.

The way you describe your credit union deal requiring a 1% of the balance at the end of each month doesn't sound right. Also the way you describe how it is to "keep the balance from ballooning" doesn't add up. Do you have a term sheet where you can copy and paste the HELOC details from?

Would you consider a Principal + Interest HELOC?

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