HELOC questions

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Stanczyk
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HELOC questions

Post by Stanczyk »

Hello Everyone,

I am a real estate investor. I have never used HELOC and have some very basic questions about it. I do not have an immediate need to use one, but I would like to keep my options open.

Here are my questions:
1) If I apply for HELOC, am I obligated to take the money right away or can I keep it unused like a line of credit or something I can access when needed?
2) If this can work as a line of credit, does the interest rate vary or is it fixed?
3) What is the typical length of these credit lines and are there prepayment penalties?

Thank you for your time.
exodusNH
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Re: HELOC questions

Post by exodusNH »

Stanczyk wrote: Thu Jun 17, 2021 11:30 am Hello Everyone,

I am a real estate investor. I have never used HELOC and have some very basic questions about it. I do not have an immediate need to use one, but I would like to keep my options open.

Here are my questions:
1) If I apply for HELOC, am I obligated to take the money right away or can I keep it unused like a line of credit or something I can access when needed?
2) If this can work as a line of credit, does the interest rate vary or is it fixed?
3) What is the typical length of these credit lines and are there prepayment penalties?

Thank you for your time.
1) You don't have to take anything right away. Sometimes you get a rate discount if you do, at least on the initial requested tranche.
2) Depends on the loan.
3) There's usually a period of time where you can draw from the line of credit during which it acts as an interest-only loan. After that period, future withdrawals aren't allows and it converts into a regular loan. The details vary.
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Stanczyk
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Re: HELOC questions

Post by Stanczyk »

So, if I don't need to draw from it right away, I could potentially use it as an emergency fund or to get $ for a down payment. My wife an I have a separate emergency fund, but the current inflationary environment makes us think about debt some more, since $ is still cheap.
LittleMaggieMae
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Re: HELOC questions

Post by LittleMaggieMae »

I'd also add that a HELOC is sometimes called a "second mortgage" even if it has a 0 balance.

Also consider this: if you have a paid off house with a 100K HELOC open (even if the balance is 0.00) it's treated as a 100K "loan" or "mortgage" when credit checks are run. ADDED: it's a liability. Even with a 0.00 balance.

Consider how the HELOC will effect your overall financial picture. You can use it as a Down Payment on a property (I've done this). The mortgage lender wanted the $$ for the Down Payment in an Account when I applied for the loan - rather than me saying I would just wire transfer from the HELOC at closing. I also used a HELOC on my paid off primary home to pay cash for an uninhabitable house. I then converted the HELOC to a new first mortgage on my primary home. The original plan was to fix up the uninhabitable house (it wasn't worth the effort/inconvenience of going thru a 203b loan application) and then get a mortgage on it to pay off the HELOC but I couldn't get a reasonable interest rate or reasonable price/fees on the under 100K mortgage on the fixed up, bright and shiny ready to rent rental/investment property - so I kept the first mortgage on my primary home.

Back in the day - I considered the HELOC on my MORTGAGED house to be part of my EF. I had 3 months expenses in my actual EF - the HELOC was a "back up" as I was growing my EF. I had a primary home with a mortgage/HELOC and I added 2 rental properties that I purchased within 2 years. The HELOC helped me sleep at night until the rentals "settled down" and I got more confidence as a landlord and in the expenses of the 2 rentals.
Last edited by LittleMaggieMae on Thu Jun 17, 2021 12:11 pm, edited 2 times in total.
exodusNH
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Re: HELOC questions

Post by exodusNH »

Stanczyk wrote: Thu Jun 17, 2021 11:45 am So, if I don't need to draw from it right away, I could potentially use it as an emergency fund or to get $ for a down payment. My wife an I have a separate emergency fund, but the current inflationary environment makes us think about debt some more, since $ is still cheap.
Sure, but keep in mind the bank can generally close the line at any time which may coincide with when you have an emergency. (q.v. great financial crisis)
LittleMaggieMae
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Re: HELOC questions

Post by LittleMaggieMae »

Stanczyk wrote: Thu Jun 17, 2021 11:45 am So, if I don't need to draw from it right away, I could potentially use it as an emergency fund or to get $ for a down payment. My wife an I have a separate emergency fund, but the current inflationary environment makes us think about debt some more, since $ is still cheap.
Be aware of the variable rate of the HELOC and that the lender can close it or lower the total amount at their whim. You can use it as a down payment - but it adds a liability (a debt) to your over all finances which may effect your ability to get a mortgage on the rental (or may effect the rate or closing costs lenders charge more for what they consider a risky mortgage loan OR a "this in not worth our time" loan (a small mortgage loan)).
pshonore
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Re: HELOC questions

Post by pshonore »

Stanczyk wrote: Thu Jun 17, 2021 11:45 am So, if I don't need to draw from it right away, I could potentially use it as an emergency fund or to get $ for a down payment. My wife an I have a separate emergency fund, but the current inflationary environment makes us think about debt some more, since $ is still cheap.
Depends on the bank. Some banks may require you require you to pay some of the closing costs (application, appraisal, recordings fees, etc.) if you don't take an immediate draw. Some may not. It all depends on the bank's policies. They're not making money on it if you're not using it.
seawolf21
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Re: HELOC questions

Post by seawolf21 »

Yes you can use it as an emergency line of credit. Some people tap it and speculate it all on TSLA, GME and bitcoin/dogecoin. LoL.

The tax deductibility on HELOC Interest depends on how the proceeds are used.
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Stanczyk
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Re: HELOC questions

Post by Stanczyk »

Do you guys have any idea if I could use HELOC to purchase property abroad and deduct intertest?
sureshoe
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Re: HELOC questions

Post by sureshoe »

Stanczyk wrote: Thu Jun 17, 2021 11:30 am Hello Everyone,

I am a real estate investor. I have never used HELOC and have some very basic questions about it. I do not have an immediate need to use one, but I would like to keep my options open.

Here are my questions:
1) If I apply for HELOC, am I obligated to take the money right away or can I keep it unused like a line of credit or something I can access when needed?
2) If this can work as a line of credit, does the interest rate vary or is it fixed?
3) What is the typical length of these credit lines and are there prepayment penalties?

Thank you for your time.
The answer on all 3 are "it depends".

#1 - Some banks offer 0 closing costs as long as you take a minimum draw (say $25k) and keep it open for at least 3 years. Others simply charge you upfront and then you can take whatever.
#2 - Generally there is a rate applied when you withdraw. Depending on the LTV and agreement, it may or may not be variable. For example, you might take out a $50k loan that takes you up to 90% at a prime+2% rate. Or, take out a $25k loan that is only 70% LTV at a prime fixed for 5 years.
#3 - again - just depends. Usually they want you to keep it open, if the bank covers closing costs. Others, if you pay the costs, there aren't penalties. Some have fixed timelines, others are interest only for 10 years before required principle payments.

The real takeaway here is decide what you want to use this for and find the right loan/bank for your needs. If you just want an emergency and/or opportunistic fund, you can find something with reasonable closing costs and a good rate upon draw.
sureshoe
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Re: HELOC questions

Post by sureshoe »

Stanczyk wrote: Thu Jun 17, 2021 2:16 pm Do you guys have any idea if I could use HELOC to purchase property abroad and deduct intertest?
I should modify. It gets complicated. If you are desperate for deductibility, why not refi the house with cash out at the current, very low rates?
seawolf21
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Re: HELOC questions

Post by seawolf21 »

Stanczyk wrote: Thu Jun 17, 2021 2:16 pm Do you guys have any idea if I could use HELOC to purchase property abroad and deduct intertest?
Don’t think so. Funds like to be used on the property that the HELOC is secured to. Don’t think you can even deduct if used to buy a property across the street.
Flashes1
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Re: HELOC questions

Post by Flashes1 »

Get the HELOC line of credit....and if possible, get it with the bank that holds the first lien in the property. Most have variable interest rates. It's my emergency funds and source for lumpy expenses like taxes, cars, etc. No prepayment penalty...comes with personal checks.

Absolutely love it.
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