HELOC or equity loan ?

Question

I am one of this who is always looking for a good Real estate investment..

I have a lot of equity on my primary residence.. how does equity line of credit work ? What I would like to do is if I see something interesting, I would like to use this towards purchase.. is it as simple as they give u a check book and you can write a check..

equity loan vs heloc?

Whoich bank has better rates these days for one or the other.

Please advise!

Josh Walker · Answer

@Kaity Pari - I am a big fan a the Home Equity Line if Credit (HELOC) as opposed to the cash out refi. The main reason that I like it is that it maximizes your cash flow and your payment decreases as you pay it down. Below, I have included some general notes I have put together for a future blog article on this topic. Happy to discuss further if you have any questions. I love this topic.

HELOC YOUR WAY TO WEALTH

Turn your house into your bank

- Can be as radical as to put your entire paycheck into your HELOC and then spend out of it (HELOC CC)

- Or put everything on a SWA CC and pay the cc off with the HELOC each month. This method gains points as well as maximizing HELOC pay down

- Find the best HELOC deal. Call a dozen or more banks. Look for a long term (10 years) before in converts to P&I, low int rate (will be variable), highest % of home (look for 90%), how long your appraisal in good for (look for 3 years) and a first year introductory rate

- pull all available funds and use them to pay down your mortgage

- Don’t worry that you need that money to live on. You are not losing access to it

- Ask your bank if they will just convert your remaining mortgage to a HELOC

- If they won’t (I would assume that they won’t) then recast your remaining mortgage to decrease your payment. Recasting your mortgage should only cost a few hundred dollars

- Add a HELOC on the remaining equity

- Pull from the HELOC and invest in a great deal

- Throw all excess cashflow at your remaining mortgage. As you pay it down, recast again and convert that equity to the HELOC. Ideally this process will not require a new appraisal (this is why you look for 3+ years)

- Over time you will work your mortgage completely into a HELOC. This is the first major milestone.

- Why is this a great milestone?

- Cash flow. Flexibility.

- Maximizing how much of your cash can work for you (you can fee more comfortable with a smaller cash emergency fund/reserves if you have access to your home equity at any time). This allows you to invest more.

- Cash flow: you have the ability to pay interest only, which is a great option when you are dealing with a curveball.

- As you pay it down, that int only payment drops as well. This is not the case with a mortgage. Your mortgage only drops when you recast it and you cannot make int only payments. This gives you added motivation to pay it off - vs. paying your mortgage down and you still have the same huge payment.

- Once your entire mortgage has been converted into a HELOC, pull as much as you can repay in 1 year and invest it in a great deal.

- This way, even without the deal, you can pay off what you drew in a year.

- After a year, do it again. But now you have the first deal added to what you can use to pay it down, so you can invest more in deal #2.

- After year 2, do it again, and so on. This creates a debt snowball that you control.

Notes

- if you have rental properties with equity, pull that equity and put it into your primary residence to pay it down and convert that amount to a HELOC

- This is significantly less risky than leaving it in rental properties. If worse comes to worse, you stop paying the mortgage on the rentals, the bank takes them, and your primary residence is even more secure.

Josh Walker · Answer

@YiBing T. - I appreciate the comment.  I am not a part of the velocity banking program.  I have researched it and I like the overall concept.  Those who I have listened to who offer it as a service seem to over complicate it in my opinion.  This may or may not be intentional to attempt to get people to pay them for their services.  When explained simply, needing a 3rd party for this kind of thing should be very rare.

I have never gone so far as to put my entire paycheck towards my HELOC each month and then pay expenses out of the HELOC, however, I think that if done correctly this could make a lot of sense to a lot of people.  You want to be as efficient as possible with your money.  This concept helps to do just that.  I hate having cash sitting around doing nothing.  I would much rather have more invested and rely on my access to a HELOC for reserves and the like.

I have been doing a version of this for the past 4 years or so.

I see a lot of people who are still very unfamiliar with HELOCs in general.  Even more people are unfamiliar with 'recasting' their mortgage.  Both of these can be very powerful tools to help create wealth.

Frank Hinck · Answer

@Josh Walker

I like the “put it in on a credit card, get points, and pay off balance with HELOC every month”. You could get 1.5% back, or points for a flight to Italy.

David M. · Answer

@Kaity Pari

I think you are asking about the same product.  A Home Equity Line of Credit (HELOC) is a credit line opened against your property.  It could be the first or second lien...  Yes, you basically have a checkbook or debit credit that you can use to access this line of credit.  During the initial draw period, you can "borrow" against your line of credit by simply using the debit card and pay down or payoff any debt "whenever."  Normally, only the interest amount is due each month.  I haven't heard of interest terms being that good, but with base rates being so low its still a low rate overall.  The nice thing is being able to take money out and put it back in at will.  At the end of the draw period (I haven't down a HELOC in years, but perhaps 10 to 20 years), they sometimes turn into a fixed rate mortgage.  During the initial draw period, its a variable interest rate.

Like I said, I actually haven't gotten a HELOC in years.  So, shop around and see what the current available terms are nowadays.

A home equity loan, the keyword being "loan," is basically another mortgage.

Good luck.

Josh Walker · Answer

@YiBing T. - I would recast after a large principal pay down.  This should only cost a few hundred dollars and should improve your cash flow.  Should be a very quick payout.

Paul Ellington · Answer

Hi @Josh Walker thank you for the great information!  I am closing on a HELOC for my investment property next week and they advertised "interest only payments" during the draw period but when I read the final contract that I will be signing it reads "minimum monthly payment will be the greater of $100 or the accrued finance charge, plus any fees and amounts past due."  I interpret this to mean that even if I don't use the HELOC I will have to pay $100/mo. unless the interest on my draw plus any fees exceeds 100 dollars.  At the rate offered I could draw 25k to equal a monthly interest payment of 100 dollars and then deploy that capital somewhere instead of paying $100/mo. for no reason.  My biggest question to you would be is this a normal term for a HELOC or have you found banks that require no monthly payment if you have no balance?  This is my first HELOC and I'm not sure what is "normal" but I had to call 10+ banks just to find one willing to open a HELOC on an investment property so my options appear limited and $100/mo. would easily be negated by a rental property's income if I choose to deploy the capital instead of not using the HELOC.  Any thoughts/advice is greatly appreciated! Thanks for the info above too, if you have time would you mind sharing what recasting a mortgage is as I'm unfamiliar.

YiBing T. · Answer

@Josh Walker

This is great information, are you part of the velocity banking program? How long have you been doing this? I just implemented the heloc to pay down mortgage last week, still getting familiar with the workflow.

Josh Walker · Answer

@Frank Hinck - ha ... exactly! I should have added that I recently discovered that Navy Federal Credit Union’s HELOC terms are awesome ... 95% LTV and a 20 year term before it converts to principal and interest!

HELOC or equity loan ?

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