HELOC or Home Equity Loan on Investment Property?
Monday, 28. June 2010
I own a house outright in another state (TX) and would like to take out a HELOC against it to help with a down payment for a house to live in here in my home state (CA). It seems to make sense because the interest rate is lower than taking out a 2nd. I would also like to do this a few months before I actually purchase to increase my credit score and help my credit history. Any thoughts?
Paul in San Diego Says:
If you own it outright (no first mortgage, so I’m not sure why you mentioned a second), then take out a first on it. A HELOC will have a much higher interest rate. The only advantage to a HELOC is that you can take the money out piecemeal, as though it were like a credit card account that’s secured by the property.
But, even if you have a zero balance, the maximum you can borrow on it is what shows up as what you owe in your credit report. That might raise some questions about your debt-to-income ratio. It’s kind of like if you took out a $15,000 car loan a few years ago and only owe $500 on it, it still shows up as a $15,000 obligation.
BTW – You can take a HELOC out on an income property. I used to have one. You’re just limited by a total loan-to-value ratio of 75%.
answer man77 Says:
If you own the home outright your best option would be to take a first mortgage as that rate would be better than the HELOC. Plus the 1st would be fixed while the HELOC would vary based on prime(not the best time to have any variable at all).
Let me know if this answered your question fully. I notice you said something about a rate on a 2nd but you can get a 2nd if you dont have a first(own outright).
chatsplas Says:
It’s not owner occupied property, NO Can Do.
Ponda Says:
Home Equity Loan would give you a fixed rate for a set amount of time. A HELOC is a variable interest rate. A Loan would be your best bet since the interest rate will remain the same for the term of the loan.
DP1980 Says:
There’s a lot to consider with your question…
Your new loan is going to require that your down payment money is not in the form of a loan that needs to be repaid. A HELOC obviously is, which would make this a fraudulent act (one which is done regularly, but is fraud none the less).
A way to get around this being fraud is to actually draw the funds out and just keep it in your account a few months ahead of time and make payments so it shows up on your credit report. This would be ok, if the HELOC doesn’t throw your debt to income ratios out of acceptable limits on your new loan.
It’s probably going to be a neutral to negative on your credit report. The reason being, it’s going to give you a lot more debt and more available credit without a long enough history to make it a good credit bump.
As the mortgage professional above stated, the money would probably be at a lower rate and non-variable with a refinance to put a first loan on your TX house. However, the great thing about a HELOC is that it’s a line of credit that can be drawn against in the future should you need the money for any other purpose. In addition the HELOC, although variable, will likely be interest only with a balloon meaning as long as you make plans for what you’re going to do should they call the loan at maturity (good possibility they’ll extend it), your payments will be much more flexible and generally lower unless we see some huge rate spikes (in the near future it’s very unlikely). If you put the money you’re saving towards the principle, HELOCs are a great tool.
If it were me, I’d probably take out the HELOC for as much as I could (who knows when you might need it for an investment opportunity or some unforseen circumstance), draw out what I needed for the downpayment and put it in my account at least 3 months before it was needed and make sure my new mortgage company was aware of the HELOC debt (to legally cover myself).
Ed Atun Says:
1 year ago and 6 years ago, this was considered as a great solution. Now we are told never to use our homes "as piggybanks". Which is what you are doing. If the value of the rental house falls below the total of the 2 mortgages, will you give up and mail the keys back to the bank. If not, go ahead and borrow the money. Try to use the same lender for the HELOC and the new house..