Setting Up a Home Equity Line of Credit is Extremely Cheap and Easy

cashYesterday I signed documents with my portfolio lender on a Home Equity Line of Credit or HELOC against my primary residence.  The best part about it 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 right 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!

Details

The line of credit has a variable rate that is 2% above the Wall Street Journal prime rate with a floor of 5% and max of 21%.  Right now the rate is 5.25% and I was able to go up to a 90% loan to value ration on my primary residence.  I am charged no monthly or annual fees and I only pay interest on money I use from the HELOC.  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 systems 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 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.

Conventional banks

I do not know how other banks handle their Home Equity Line’s, 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 be a customer of theirs and have excellent credit, but that is extremely rare these days.

Lines of credit on rental properties

I have not done this yet, but I can also get a line of credit on my rental properties.  My bank considers this a business line of credit and the terms are a little different.  The banks 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.  If I need it in the future, I may consider a business line of credit, but I will have to pay for new appraisals to get the full value out of my properties.

The terms are also different for business lines of credit.  The bank will only offer a two or one year term on the business line of credit and they will only loan up to 80% loan to value.  They will do 80% loan to value on a one year term line and 70% on a two year line of credit.  They also have a minimum interest rate of 6% on the business line of credit.  The terms for the primary residence are much better than the business line if you are considering choosing between the two.

Downfall of a line of credit

I want to thank Thai( an Invest Four More follower), who commented about a possible downfall of a 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 you lender first.  They can run the numbers and make sure the line of credit won’t cause more harm than good.

Conclusion

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 credits, allow investors access to cash immediately 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.

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5 responses to “Setting Up a Home Equity Line of Credit is Extremely Cheap and Easy

  1. My first thought: that’s a really small line of credit! 🙂

  2. Great website mark. I haven’t looked into HELOCs in a while. When I had one in the early to mid 2000s, once opened it counts against your overall debt. Even if you didn’t pull any money out, that’s because you can pull it out at any time.

    This is probably not an issue with you because you work with a portfolio lender. Some people may have issues qualifying for 2nd-4th conventional mortgages because of the extra debt. Something to look into.

    Keep up the blogging and articles, I enjoy reading them!

    Thai

    • That’s a really good point Thai. I think it would count as debt even if you don’t take money out. That is definitely something investors should consider before getting a HELOC. It could be a double edged sword for some. Someone might be able to get a loan, but they don’t have the cash to put down on a property. They get the HELOC and they might not qualify for the loan now that they have the cash.

  3. congrats

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