HELOC question. Just curious!

[Courtney Downtain]

Hi BP team Question- this is just hypothetical, What happens if you take out a home equity line of credit on your home that you have $40,000 worth of equity in, in order to use for a down payment on a second home, and then the market crashes? What happens to your mortgage?

[Mike H.]

I guess I'm wondering what your concern might be here.

Ultimately, if you take out a heloc on your primary residence and use it as a down payment on another investment property. And then the market crashes and both house go down in value, neither bank is going to do anything that would change your payments or call in your loans to paid in full.

There is no escalation or nothing improper in using the funds of a heloc to buy an investment property. 

Now, as was mentioned by the previous poster, the bank that gives you the heloc may see that the value of your home isn't worth enough to cover your 1st and 2nd loan (the heloc). So they may close the heloc.

But that does not mean you have to pay it all back immediately. All that means is that you will not be able to borrow more money from the heloc again. Your payments and terms will remain the same.

Here is what I would add. I started investing in real estate with a 43k heloc. About a year after the crash started, I pulled out every penny and stuck it in my bank to use as my reserves so I could qualify for loans.  About 8 or 9 mos after I pulled it all out, the bank closed my heloc. I've been paying 100 to 120 bucks a month ever since. But its the cheapest money you'll ever get.

Another way to look at it is what is your monthly payment going to be on the heloc if you take out 40k? And if you use that 40k as a down payment on an investment property, how much money are you going to make on the investment property.

If you can take out 40k and your payments are 150 a month. And turn around and buy a rental property with it and make 300 a month, then to me I would do it. Even if the market turns down on property values, I don't see the rental rates going lower at all so what would you really care?  You'll be making more money than your heloc payment.

Quite honestly, the only risk in my mind to the buy and hold strategy is if they start giving crazy loans to anybody that wants one again and then you can't find renters. And if they do that, the price of homes will have to skyrocket again too and then you can just sell your rental and make a nice profit.

btw: That 43k heloc turned into 63 (soon to be 64) homes for me 9 or so years later. And thats with no flipping at all. I haven't sold a home since I started buying rentals. So while 40k may not sound like much, sometimes it can go a long, long way if you know how to work it. :-)