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Things you wish you knew about HELOC

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  • Things you wish you knew about HELOC

    I was offered a HELOC for 95% LTV of my home equity through a local community bank as our banking relationship has strengthened. I plan to use it only for rehabs on our investment properties.
    I understand that if I stretch myself thin and the home value drops in a bear market, this can put me underwater. However, I'm not planning to keep a debt for long whenever I will use it.
    No maintenance fee, no application fee.

    In your experience, is there anything you wish you knew about HELOC before you you started using it? Any red flags?

    Thank you

  • #2
    Couple points:
    a. Make sure the rate offered is competitive.
    b. IMHO only utilize potential equity up to 80% LTV. If there is no additional equity, then you should seek another source of funds for your rehab projects.
    c. How long is the HELOC loan availability in place? A year, 5 years....
    d. When things go sideways economically, HELOC's will be the first place a bank will 'cut its loan book' by reducing HELOC LTV's limits, getting very conservative and requiring appraisals, and not allowing additional borrowings of existing HELOC's.
    e. HELOC's are a form of borrowing that is lower cost (usually), though not particularly stable form of funding/availability standpoint relative to the 'ooh btw the bank has a lien on your home'.

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    • #3
      No closing cost HELOC's (with no annual fees) have been an integral part of my financial strategy for two decades - I've always had rates at prime minus 50 basis points. They are not the best choice in a rising interest rate environment, but we're not really worried about that in the foreseeable future. I've also tapped auto equity cash out at rates of 1.75-2%.

      If you need a relatively small amount of money and you plan on paying it off within 15-18 months, a 0% no balance transfer fee CC may be a better option, or 0% on purchases with cash back. We've done this up to $50K-$100K limits, at times. Let someone else absorb the interest.

      If the debt will take a few years to pay back, a traditional 10-15 year loan with cash out on the property may be best based on current rates, even factoring in closing costs. Unless you need revolving credit.

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      • #4
        You may want to check with your accountant about the deductability of the interest on the HELOC when using it in your real estate business. If it isn't possible you may want to use a real estate business line of credit instead of a HELOC so the interest is a business expense. Depending on the amounts involved it may be worth the small difference in fees between the LOCs.

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        • #5
          HELOC counts against your loan debt ratio. This impacts calculations for future loans/purchases. So if you're building RE or building a custom or contingency offer homes, HELOC will drag your debt ratio.

          Make sure it doesn't close after xx years. Typically try to get same bank as your primary mortgage. This gives it easier access, and less likely becoming problematic on bank finances as they have less incentive to mess with your HELOC if you have a nice mortgage in place with them already. -- last thing a bank in trouble is mortgage payoffs from good standing loans.

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