1st position lien HELOC liquid??

Question

Hello wonderful people of BP.

I have a question regarding a 1st position HELOC “all-in-one” “offset mortgage”

I have a basic understanding of the way in which these products work. But I may be missing some key information. Just trying to wrap my head around how this strategy would affect my future investments.

Currently I own 2 cash flowing investment properties. So I’ve got excess capital sitting around just waiting to deploy towards repairs & cap ex. I’m interested to convert my primary home to a 1st position HELOC to accelerate my savings to reinvest.

My concern is that if I pursue this system of dumping my surplus income into equity, how then would I look to a lender if seeking to expand my portfolio via a traditional mortgage.

Under normal circumstances, lets say I have 50k sitting in my savings account. I look for a mortgage and have enough liquid funds to close. DTI is solid. No problems.

With an All-in-one HELOC, how would an underwriter differentiate liquid from equity? Wouldn’t it appear that I have no cash?

Thanks for your insight.

-John

Justin Phillips · Answer

Hey John, If a situation ever arose where you needed to show cash, you'd simply ACH transfer that money from you AIO checking account/LOC to a secondary bank account. Depending on what it's for, it may need to season, but that would be the way to do it. You're onto a great strategy, and an incredible tool for your financial tool belt.

Jeff S. · Answer

@John Alosio lenders for smaller residential type stuff seem less interested in cash and net worth and more interested in solid verifiable and long term income and debt to income ratios and equity.

If I understand your question correctly you want a HELOC on your residence in first position. So to qualify you need enough income to be able to pay the payments as if the HELOC were maxed out. This is what I have on my home although the equity is 5 times the HELOC capabilities and my balance is 0.

John Alosio · Answer

@Jeff S.

From what i understand, you would have access to 80~90% of the equity already in place from the beginning of the loan.

Thank you for attempting to shed some light on my question. Unfortunately sounds like "it depends"

If anyone else has some first-hand experience with one of these type of loans please feel free to chime in.

I'm starting to second guess myself on If I'm spending too much time thinking about creative strategies to accelerate my own money - not enough time finding deals and bringing OPM into the mix. I keep hearing "Just find a deal, the money will come."

Jeff S. · Answer

Hey@Justin Phillips So these loans are adjustable rate loans I am assuming. I found it better to have a 1st fixed rate and a 2nd HELOC that is adjustable. It is hard to justify getting an adjustable rate these days IMO for permanent financing. Are these loans sold or held on the banks books?

@John Alosio the key word here that Justin mentioned is "seasoned". If it has been in your checking account for a while then it doesn't look like you just borrowed it.

John Alosio · Answer

@Justin Phillips Thank you!I'm curious exactly how one of your "life changer loans" is set up. Would i just see a total loan balance that grows and shrinks as money comes in and out? Would you happen to have a sample screenshot of an active account so i can get an idea of how one of these beasts operates.

Thanks

-John

Jeff S. · Answer

@John Alosio if the lender is good with that then there is no problem. One certainly could have their paycheck deposited directly into their HELOC. Is the HELOC loan only the amount of the mortgage balance or can you draw from additional equity? Googled the all in one. Interesting concept. Your original question was would an underwriter view your equity as cash. I don't believe they would but they might. Equity is not the same as cash when you start filling out those simple minded forms. You are not supposed to borrow down payments as a rule so if you don't have the cash sitting in a separate account it could be a problem IMO.

John Alosio · Answer

@Jeff S.

I'm not quite sure we are talking about the same thing. It sounds like you are speaking of a traditional HELOC. Are you familiar with this new(ish?) strategy that is gaining popularity. Its commonly referred to as an "all-in-one mortgage"

Allow me to go into more details:

i currently have a mortgage on my primary, with a decent chunk of equity built in. Instead of taking a HELOC out for the equity, there is a strategy that allows me to replace my mortgage with a 1st position HELOC, starting at a balance of my mortgage payoff.

This HELOC works as a pass through banking account. My W-2 paycheck gets direct-deposited into this account and I use the it to pay for things as needed. Effectively, this lowers the daily balance, lowering this interest burden. So over time, if used properly, you accelerate the pay down of the loan balance.

This is similar to using a traditional HELOC to systematically pay down mortgage, but the "all-in-one" it's a much more streamline product. And I intend to use the growing equity to reinvest short term (fix n flip, BRRRR)

I hope this makes sense.

Jeff S. · Answer

@John Alosio When you say park your cash in your HELOC I understand you to say you are taking cash and would pay down debt on your HELOC. This then sounds like you have a mortgage which you would pay off with the HELOC and would pay down debt until you need the cash.

The bank will want to see you have enough cash on hand to buy your property and do what you need to do. You will want to have the cash there and not need to borrow it even though you have to ability to get it on your own home.

Once you have your loan in place you can do what you like with the cash. I use credit lines as reserves which is a little risky because credit lines can be closed when banks have liquidity problems but I have the cash ability to liquidate assets if that were to happen.

John Alosio · Answer

@Jeff S.

Thank you for your reply.

I'm sorry if my question was a bit muddled, but you did touch on a helpful portion.

To clarify, I'm looking to get a 1st position HELOC on my primary. Which I should not have any problems to qualify. I'm just curious about what happens after that. With an open HELOC, parking my idle cash into it instead of holding in a savings account. Would that hurt me when pursuing future investments due to not having any actual cash?

Your comment is telling me that it probably shouldn't matter, as long as i have an attractive income/equity to justify more debt. Correct?

Thanks!

1st position lien HELOC liquid??

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