Are there Benefits to HELOC on Primary vs Rental Properties?

Question

Hi all,

Feel like I have this one kind of sorted out but I just wanted to run it by some people who may know better than myself.

The plan is to pull out a HELOC to help subsidize a downpayment on my next rental property. The issue that I'm facing now is whether I want to pull it out against one of my rentals or on my primary.

I have found a bank that will allow me to borrow as a second lien on rentals but their rates are higher than what I could get when just doing it against my primary.

What I'm most worried about is what happens in a worst case scenario, should something drastic happen in the market.

From what I understand, using the money against a rental doesn't necessarily provide much more of a safety blanket in case things hit the fan because if, somehow, the HELOC lender can't recover their money, you'll get sued anyways. In which case, I suppose you can find the money somewhere else and not risk the house you live in. Whereas, if you were to default on a HELOC against your primary, you immediately go into foreclosure and have a bigger concern than getting sued?

All-in-all the amount of the loan shouldn't be substantial enough to the point where I wouldn't be able to cover it out of pocket anyways if need be, just want to make sure that I'm not missing anything.

Does it sound like I have the situation figured out or is there something I might be missing? Anyone faced this situation? What route did you go?

Craig Warner · Answer

We handle 2nd's on both primary and investment properties. We'll go as high as 90% on a primary residence whereas on an investment property only 70%. If you default on either, we the lender we'll hunt you down and make you pay us back. JK. Remember no lender wants to own your property, we are not in the business of reselling real estate. However, after exhausting payback remedies to get you current, we'll end up foreclosing on the property with the lien. If you are concerned use your investment property as collateral. I lend nationwide, so if I can be of service or just want to pick my brain, give me a call.

Kerry Baird · Answer

HELOCs are very much a short term product, because the interest rates can go up precipitously, they have been called due in past credit crisis situations. I like to have one as a safety net or emergency fund. There needs to be a plan to pay the line under a range of interest rates, and to pay it off.

There is risk in pulling cash out of our own residence, and there is risk in pulling cash at a high interest rate out of a rental. If I know I have a great fix and flip deal, I might consider using one for the short term; do the reno and pay it off again.

Ray Williams · Answer

I'd love to give feedback, although I am not totally clear on the question. It sounds like you are concerned about worse case scenarios? End of the day borrowing against a rental will always cost more than your primary residence. One thing to confirm is the interest deduction on the HELOC, primary V investment as it pertains to the next acquisition. Again, not totally sure I understand your question though.

Are there Benefits to HELOC on Primary vs Rental Properties?

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