Using home equity loan for downpayment on investment property

[Jayme Mendal]

Hi - I'm new to the site, and wanted to jump right in by posing a question for the community...

I would like to acquire a property, but am short $20-30K for the downpayment. That said, I have $300K+ equity in my primary residence. Is it possible to (and/or advisable to) draw a home equity loan against my primary to bridge the shortfall for the downpayment and help me acquire the property? Any alternatives or red flags I should be thinking about?

Any thoughts or suggestions on this would be much appreciated!

[Jayme Mendal]

Andrew - For an investment property, you will likely only be able to get a mortgage for 75-80% of the appraised value for the property. So, if you make the downpayment with a HELOC, the expect to pay it down with a new mortgage, you will need to buy the property 20-25% below market value. Otherwise, you will not be able to get a mortgage large enough to pay back the HELOC.

Here's the example:

Say the property cost 100K. You put 25K down with a HELOC, and take a mortgage for 75K. Then, you want to put a new mortgage on the property for 100K to pay down the 25K HELOC. The only way you can get a mortgage on an investment property (from most lenders) for 100K, is if the value of the property is $125K or greater. So, unless you are able to buy the property at $25K (or 20%) below market value, you will not be able to get a mortgage large enough to pay down the HELOC.