There are many reasons to get a HELOC or home equity line of credit; college money, house improvements or in my case to invest in rental properties. Yesterday I signed documents with my portfolio lender on a Home Equity Line of Credit against my primary residence. The best part was, I spent a grand total of $78 to set up a $60,000 line of credit. I don’t need the line of credit now, but it will be very nice to have that money available if a great deal comes up and I don’t have enough cash. This flexibility is perfect for my long-term rental strategy!
How do you qualify for a home equity line of credit (HELOC)?
Qualifying for a line of credit is just like qualifying for a regular mortgage. The bank will want to see a good credit score and income to back up the loan amount. Each bank will have different requirements on what exactly they will require. You also must have equity in your home. Equity is the difference between what your home is worth and what you owe against your home currently. Banks will have different loan to value ratios they will allow, and it varies on what type of property you own as well; investment or personal residence.
Details on my HELOC against my primary residence
The home equity line of credit has a variable rate that is 2 percent above the Wall Street Journal prime rate with a floor of 5 percent and max of 21 percent. Right now the rate is 5.25 percent and I was able to go up to a 90 percent loan to value ratio on my primary residence. I am charged no monthly or annual fees, and I only pay interest on money I use from the home equity line of credit. The reason it was so cheap is there was no appraisal required. The lender used one of their models to value my home and it was completely free. If I thought the bank’s valuation was too low, I could have ordered an appraisal and hoped it came in higher. My only costs were recording fees, a flood certification and title fee. The home equity line of credit is good for five years, and all payments come directly out of my checking account with my portfolio lender. The minimum payments are interest only, but I can pay off as much as I want at any time.
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Can you get a HELOC with conventional banks?
I do not know how other banks handle their home equity line of credits, but they may charge a little more than mine did. I would check with them right away to see what your options are. If you are short on cash and looking to start investing, this may be the key to get you started! I know some banks like Wells Fargo will even give personal lines of credit that are not secured against any collateral. Wells Fargo requires you to be a customer of theirs and have excellent credit, but that is extremely rare these days.
How hard is it to get a home equity line of credit on investment properties?
You can also get a home equity line of credit on investment properties. My bank considers this a business line of credit, and the terms are a little different from your personal residence. The bank can still use their valuation system and do not require an appraisal. However, I checked the values on all of my properties and all the values came in very low. I think this may be because I bought the homes within the last couple of years for much less than they are worth now.
The terms are also different for business lines of credit. The bank will only offer a three-year term on the investment property with a maximum 75 percent loan to value ratio. The rate will be Prime + 2, with a floor rate of 2 percent. Fees are typically 1 percent origination plus any applicable 3rd party fee (i.e. title, filing, flood, appraisal). The HELOC on the investment property is definitely more expensive than the personal residence. These numbers are for my local bank, other banks may have much different rates. My bank also requires a one year seasoning period, which means they will base their loan amount on the last sales price, not the appraisal if the home was purchased within the last year.
What are the disadvantages of a home equity line of credit?
If you do get a business or personal line of credit, it will most likely count as debt against you even if you aren’t using the money. A line of credit may cause your debt to income ratio to rise to a level where most banks will not feel comfortable loaning you money. If you are considering a line of credit, but are worried about your debt to income ratio please talk to your lender first. They can run the numbers and make sure the line of credit won’t cause more harm than good.
A home equity line of credit gives a real estate investor a great deal of flexibility no matter what kind of investing they do. I do a lot of fix and flipping as well as investing in long-term rentals. Lines of credit allow investors access to cash to make repairs, buy properties or cover carrying costs. Having enough available cash can be the difference between success and failure for a real estate investor. A HELOC is a great way for me to continue to purchase properties below market value.