Learning, Sharing, and Teaching > Real Estate and Landlording

Home equity loan - explained?

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Invester17:
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:
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:
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:
Pretty much.

SeaWA:

--- Quote from: sokoloff on July 17, 2018, 02:56:52 PM ---Pretty much.

--- End quote ---

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?

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