HELOC and Refi to increase liquidity?

Question

I have a 80% LTV on a conventional loan at 3.85%. I'm wondering if it's possible to take advantage of lower rates and do a HELOC at the same time? Is this newbie thinking? I'd like to avoid double appraisal fees, and I have a small business that will show a significant income drop during the pandemic so I feel like I'm more likely to secure a loan with my current situation on paper than If I wait.

My goals are to finish the rehab and get tenants, and to create some access to cash for options in the future. I'd love to get a second property and am hoping that the market will soften though doubtful it will fall far as I'm in the Bay Area. As my small business will take a hit over the next year I would like to create more security with rental income. Any advice is greatly appreciated!

Kerry Baird · Answer

While there are a few banks that will go above 80% LTV on a HELOC, it isn’t very common.   Credit unions and regional banks often offer HELOCs because they help local house owners to improve the communities in which they are located. A few bigger banks do, too, but the “rules” for these loans (HELOCs or second mortgages) vary quite a bit. Rate and payback period, interest only period and how long the rate is steady fixed or variable, each lender may have a different set of parameters. You have to call around and ask. I take notes and ask for details that I can compare.Regarding a refinance, You aren’t going to get low enough mortgage rates on the first to be worth the closing costs.

As for an appraisal, some use desktop underwriting, or automatic valuation models,  vs an appraisal. This can work for you, as it is cheaper than a full appraisal. Again, ask which is used.

If I Have an appraiser or BPO (broker’s price opinion) come inside, and I have done a lot of repairs, I show the appraiser each of the items I have replaced, and emphasize the grade. For example, granite vs butcher block. Metal roof vs shingle vs asphalt. The value of the house is also influenced by recent sales, so I am aware of those.

So, do repairs and get the value increased, and inquire about a HELOC, then have a plan to pay it off or possibly use it again on another property.

Arlen Chou · Answer

@Tobey Grey the lending environment is extremely tight now. Although your thinking is correct, the timing is probably off. The current lending environment is extremely tight. If you are currently at an 80% LTV, and additional HELOC will be additional debt on top of that number. Coupled with the fact that most banks are bracing themselves for a wave of defaults and the fact that your business has been hit, I think you might be facing some strong headwinds. Sorry for the bad news, but I think it might be tough to implement your strategy at this current time. I don't think it can hurt to ask, but be ready for the bad news.

I do wish you good luck!

Blake Dailey · Answer

I would think a lender would require you to stabilize the property before lending more on it with a refinance - especially now that lending requirements are tightening up. The property wouldn't be worth any more unless repairs were made, so you will probably want to finish those and get it rented. On rental properties the lender will also look at the debt service coverage ration (DSCR) which is the ratio of the rent to cover the mortgage. So to meet that requirement for a refinance you would need to have the property rented.

Now if you refi'd up to 80% LTV, that is normally the highest a lender will allow you to leverage the property so you would likely not be able to access additional equity with a line of credit. You could either refinance to 80% LTV or take the line of credit up to 80% LTV. If you did both you would also have two sets of fees and opening a line of credit can have similar fees to a refinance, so that could get expensive, especially with home prices in the Bay area.

Blake Dailey · Answer

@Tobey Grey if you owner occupy you should be fine in that regard, as long as your income would cover the mortgage - the lender would then look at your debt to income ration (DTI) aka the amount of total debt you have compared to your income. In this example they look at your credit worthiness as opposed to a commercial rental property loan that may only look at the asset to pay the debt service. I think it would be a good idea to take advantage of the lower interest rates now, but I would also caution about taking on excessive debt right now. So that will just depend on your personal situation and risk tolerance. Like you said, you can always rent rooms to cover the expenses if it comes down to it.

Tobey Grey · Answer

@Blake Dailey Thanks thats very helpful! DSCR is new to me, I did some reading and am wondering if any of this is relaxed if you occupy the property (since I'd be living in the rear unit)? Or if I stayed in the main house and took on roommates? That makes sense that Refi and HELOC combo with fees wouldn't be a benefit despite possible interest savings. I think I might between a rock and a hard place since if I wait to stabilize the property the softened market I'm hoping for may have come and gone.

Tobey Grey · Answer

@Arlen Chou Appreciate that, I keep hearing banks are being very conservative but I guess I was hoping that CA might be more exempt with so much WFH tech money and high rental prices but that wasn't well researched. I have a few months before potential losses may arise, right now we're stable but was hoping to make a move before that was noticeable. Do you think I might have more luck with one product over the over if I decide to give it a shot?

HELOC and Refi to increase liquidity?

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