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Yep. Debt is debt, according to a mortgage broker or banker. Whatever mortgage, HELOC, credit card, car loan, furniture store, etc. payments you make each month, that all goes into the debt/income ratio calculation.

As for paying it back, monthly payments are based on how much you've used. Each month you get a statement (just like a credit card) saying how much you owe that month, and it's Interest Only. If you pulled out $10K and your interest rate is say 11%, you're montly payments are (roughly) $91 per month. Each month that is what you owe unless you pull out more money from the HELOC.

You CAN pay extra to bring down the principle amount you owe. HOWEVER, some HELOCs have a pre-payment penalty, so read the writing very carefully.

Emrah

Home Equity Linne Of Credit.

1. Whomever you want to open it with (bank, mortgage company, whatever; they all do it), you go to them and tell them you want to open one.

2. They send out an appraiser to your house. They determine what it's worth. Then subtract what you owe. The difference is the equity you have in the place. Example: House market value = $200K. Owe $150K on mortgage. Equity = $50K.

3. They tell you that you can open up a Line of Credit worth $50K (as per example above). And that's just what it is; a line of credit. You'll get a bunch of checks. You can use them to pay or buy anything (but you really shouldn't; people treat them like credit cards (which is pretty much what they are) and get into more debt that works against them). Basically, you have up to $50K to use however you want.

It is free to open a HELOC. You DO NOT pay on just an open credit line. You ONLY pay (usually Interest Only) on the amount you use. If you write a $10K check for something, you'll be paying monthly payments based on the $10K you used, not the full $50K. You pay for what you use.

Emrah

Also, you get charged when you refi. Opening up a HELOC is usually free. It's a few thousand dollars you're saving up front. It may seem "small" in the big picture, but again, how long will you keep it? When will you sell/refi again? It could add up.

Emrah

Yes, it IS debt, but remember that all HELOC payments are Interest-Only (yes, you CAN send extra to pay it off). The beauty of that is every penny you pay each month to pay the HELOC is tax-deductable. Is it better than re-mortgaging? I dunno. I did the HELOC thing to buy my first rental.

Either way, your money is "tied up" in the investment property until you sell it. With a re-mortgage, you cash it out, pay it towards the new house, and that's it. With a HELOC, you're paying each month on top of your mortgage(s). However, when you re-mortgage, you've now got a higher mortgage, so you're paying more on that as well.

I'd do the math either way and see which is most profitable for your needs.

Emrah

I think what people are trying to say is that you're only paying interest, and not putting a dent in the principle at all. I.E. if you get a loan for 150K, then even after "X" many years of making interest-only payments, you still owe 150K on the loan.

However, remember that your house is appreciating in value over the years. It's just that you are not contributing to reducing the original mortgage amount.

Emrah

Welcome,

I'm in Chaska myself. Only 1 rental so far in Chanhassen. Slowly looking for another, so I'm definitely a beginner. Anyway, welcome again.

Emrah

It's the book that kicked off the whole REI thing for me. Love it. Some call him a crook, some call most of what he wrote complete BS and fabrication (i.e. flat out lies) (check John T. Reed's website...), but whatever. It opened my eyes.

It could be complete fiction for all I care. It's the first book that made me open my eyes about money, financial repsonsibility, tax advantagtes, etc. Most importantly, it makes you THINK like a successful person. Your outlook on your life and your future changes. You think in a completely different way than "normal" people do.

I re-read it after a year (just a couple of months ago actually), just to "re-center" myself after venturing into RE after reading it the first time. I was amazed that for the past year, I'd been thinking like the book and the principles. I guess it stuck.

Emrah

Sounds like a good idea. Most people start out in RE by first buying their own home to live in. When they want to move out, the rent out the existing home, and move to another home themselves. Tada.... you now become a landlord with your first rental property.

Of course, this is a vast simplification. You have to make sure rent will be at least as much (preferably more) than rent, taxes, emergency fix-it fund, and association fees, etc. Another tough part is coming up with the money as a downpayment for your second house when you want to move out of the first.

I'd recommend you read as many RE books as you can possible get your hands on to find out some general RE investing strategies and then ask tons of questions. Good luck.

Emrah

Thanks for the honesty. Over the course of the past year, I've always appreciated your candor in your posts towards others.

I DO think of this as a business, and the properties (personal and rental) are being paid for without resorting to "minimum payment" options as it is. In other words, I didn't get the Option ARMs to be able to afford a house that I otherwise would not have afforded.

I only mean that in order to come up with more money for a downpayment on yet another property, what the best solution (strategy?) would be to best use my money.

If I DID decide to go towards a minimum payment route (to save money for a downpayment), I wouldn't let the mortgage rise to a point that it outpaces appreciation!

I think I need to run the numbers around a little better and come up with "what-if?" scenarios.

Emrah

I plan on keeping both long-term, though on my own residence, I don't plan on living in it for more than a couple more years. I WILL turn it into a rental though.

On both properties, I can refinance after 3 years (which I'll probably do to a fixed rate) before my payments shoot up a bunch. Again, the purpose was to have the flexibility to either:

1. Cover potential missed rent or vacancy should the need arise temporarily

2. Save away money (by making minimum payments instead of Interest Only or Fixed Rate payments) to have enough for a downpayment on yet another property

I realize the more I let the mortgage rise (by making the minum (less than Interest Only) payments), the less equity I'll have. Especially with the modest appreciation in the region. So, I'm stuck with the dilema of Do I "sacrifice" equity in the first 2 homes (my personal and 1st rental) to kickstart my fledgling "empire" :wink:?

Would I be better off using money from my HELOC as a downpayment (I did that to buy the first rental). Do I open a (highest interest rate of them all) Unsecured Line of Credit to do that?

Opinions?

Emrah