Author Topic: Home equity loan - explained?  (Read 789 times)

Invester17

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Home equity loan - explained?
« on: July 17, 2018, 02:38:14 PM »
Hi all,

I've been reading about home equity loans, but I'm still a bit confused. I have a property with 150k in equity (based on the last appraisal). If I wanted to purchase a new property for 150k. How would look? I have an emergency fund and could pay a traditional down payment/mortgage. However, I want to explore all options to get more real estate.

Would the lender just give me the cash to buy the 150k property, but I'd have a new loan (separate from the primary loan for the original property?). If so, what caveats exist and what kind of interest rates are expected?

I'll surely have more questions, but this will get us started.

Thanks!

sokoloff

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Re: Home equity loan - explained?
« Reply #1 on: July 17, 2018, 02:48:37 PM »
In general, getting a HELOC that would leave you with 15% total equity if you maxed out the HELOC is possible.

So, if your house is worth $500K and you owe $350K on it, you would be able to get to a max total borrowing of $425K (leaving you with $75K or 15% equity). That would get you a HELOC of up to $75K ($425K - $350K).

To buy a property worth $150K, you might only need to put down $30K (20%) or less, so you should be able to pull this off.

You would owe on three loans: your (current) $325K mortgage, your HELOC ($30K-75K in this case), and the mortgage on the new place ($75K-120K).

Invester17

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Re: Home equity loan - explained?
« Reply #2 on: July 17, 2018, 02:54:16 PM »
Cool, you answered my question perfectly.

Next up, this sounds like it might just be more work/not even worth it if you have the 30k down payment in cash. Fair assumption? That would leave you with just 2 loans instead of 3. The only downside is that you had to use cash which could have been used/invested elsewhere.

sokoloff

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Re: Home equity loan - explained?
« Reply #3 on: July 17, 2018, 02:56:52 PM »
Pretty much.

SeaWA

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Re: Home equity loan - explained?
« Reply #4 on: July 19, 2018, 10:10:19 PM »
Pretty much.

Can you weigh in on the benefits and costs of a HELOC (home equity line of credit) vs. a home equity loan?

My wife and I are planning to buy a second home and would like to draw some home equity from our first home.

I'm considering taking a home equity loan on house #1 instead of a HELOC because I believe the HELOC interest rate can change, where as the home equity loan has a fixed rate. If I intend to treat the loan for the down payment on house #2 as part of the mortgage on house #2, then I will pay it off over time, and I want a fixed rate to prevent increases in payments.

In the case of the OP, they may want a HELOC because they are unsure how much they need. In that case a HELOC is simply a line of credit where you may draw money as you need it, and not draw money when you don't need it. For example if the OP gets a HELOC for 75K but turns out to only need 30K, then they simply never draw the other 45K.

Does this make sense? Am I missing something?

Lmoot

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Re: Home equity loan - explained?
« Reply #5 on: July 20, 2018, 02:05:04 AM »
Iíve never been able to work out how a HELOC would be an advantage for me. Like you, if I was going to take out a loan Iíd rather just get another mortgage, separate from my primary property. If I needed to do renovations, in this age of 0% APR credit card offers lasting up to two years, I have and would continue to just finance house related things with a ďfreeĒ loan.

 Iíve even considered taking a HELOC to use as a down payment on another property, but in my case that might actually work against me since a lender for the 2nd mortgage would consider my HELOC debt to be used towards calculating my debt to income ratio.

For me it just seems like a lot of hassle, when there are easier and cheaper methods of getting money or financing. Maybe thatís why I associated HELOCS with people who either donít have savings, the ability to save a large amount of money in a short period of time, or donít have credit good enough to qualify for large limit cards with favorable promotions. And unfortunately those are the last people who should get a HELOC, as the recession showed.

Spitfire

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Re: Home equity loan - explained?
« Reply #6 on: July 20, 2018, 01:11:05 PM »
The advantage of a HELOC is that you can use it multiple times without applying for a new loan every time. For example, if you want to fix and flip and can do it all with HELOC funds, you get the treatment of a cash buyer and once you sell the house you can pay the HELOC back and repeat the process.

If you are doing a specific, one time thing, home equity loan can be better since it is fixed, though many HELOC's will allow you to fix part of the line if you want.

K-ice

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Re: Home equity loan - explained?
« Reply #7 on: July 30, 2018, 09:42:37 PM »
The advantage of a HELOC is that you can use it multiple times without applying for a new loan every time.

^^^ This.

We had a hybrid HELOC/mortgage on our primary home for about 4 years and never touched, or carried a balance on the HELOC.  The mortgage part was at a fixed rate that we paid regularly. The HELOC borrowing potential grew a little bit each time the mortgage was paid.

Then my partner had the opportunity to buy 1/2 of a multi-plex.  We quickly had the cash available. I was actually surprised how easy it was to take a shit load of money out of the HELOC. I called in advance but it wasn't necessary.  Then within a month a commercial mortgage was put on the multi-plex. (I know higher interest rate but it was just better to keep this separate.)  The HELOC allowed us to act quickly. 

Then about 2 years later a mortgage was due on our rental property. The bank was screwing around offering high interest rates on renewal. The advertised rates were only good for new customers. They literally told us to leave their bank and come back to get the good rate.  So we called their bluff and left. We had enough money in the HELOC  (at another bank) to pay for the mortgage outright. We have now been 3 years with a rental property financed with a HELOC. It has a variable rate, that has crept up recently, but at the same time we have been able to pay it off quickly with no restrictions (Canada has lots of restrictions for paying down your mortgage fast, HELOCS don't.)  I was actually looking and the interest we paid 2y ago was $850/month and it is now down to $250.  Even though rates went up we have paid off so much it doesn't really matter.   

I would only recommend HELOCs to someone who is disciplined and not racking up consumer debt. 

I liked that we had ours almost 4 years and never touched it.