Home Line of Credit

[paulrduchesne]

Hey everyone, me again. I`m sure this question has been answered a million times on this forum, but I`ll ask it again..

Why is having a HLOC so much better than having a standard mortgage?

 

[JoefromTO]

QUOTE (paulrduchesne @ Oct 14 2009, 09:10 AM) Hey everyone, me again. I`m sure this question has been answered a million times on this forum, but I`ll ask it again..

Why is having a HLOC so much better than having a standard mortgage?


Well, the way your wording it, your talking about 2 different things. I think what your refering to is a mortgage WITH a LOC built in.

Having that type of mortgage means that as you pay down your debt, the amount of equity you can pull out of the property in the form of a Line of Credit increases.

Value that is tied up in a property can be used to purchase another property. Having a property that is debt free is nice...but, if your intention is to increase your overall cashflow and or net worth, then pulling equity out and buying other properties is a way to do it without using your own cash.

 

[tbarcier]

Use the seach function, I`m sure you will find what you are looking for.

 

[LifesMoneyPeople]

Thomas Beyer has great stuff go here to read latest post is on this subject

http://80lessonslearned.blogspot.com/

 

[Thomas Beyer]

QUOTE (paulrduchesne @ Oct 14 2009, 07:10 AM) Why is having a HLOC so much better than having a standard mortgage?
read this here:

http://80lessonslearned.blogspot.com/2009/...e-pros-and.html

 

[holymoly]

QUOTE (thomasbeyer2000 @ Oct 14 2009, 01:31 PM) read this here:

http://80lessonslearned.blogspot.com/2009/...e-pros-and.html

That site says, about a LOC: "it can be up to 75% or even 80% of the value of your property, behind a mortgage."

I`m a bit confused. Is this referring to the fact that you can get a secured LOC for up to that percentage of the value of your home? (I have one of these.)

At first I thought it meant that if you pay for a RE purchase using your LOC, the LOC can only fund 75-80% of the cost of the place you`re buying. But that`s not true, right? Am I right in thinking I can put 100% of the purchase on my LOC -- ie use the LOC for the deposit, downpayment and balance? I`m hoping/planning to use my LOC this way soon.

By the way, thanks for the link.

 

[JoefromTO]

QUOTE (holymoly @ Oct 14 2009, 01:03 PM) That site says, about a LOC: "it can be up to 75% or even 80% of the value of your property, behind a mortgage."

I`m a bit confused. Is this referring to the fact that you can get a secured LOC for up to that percentage of the value of your home? (I have one of these.) Yes, but deduct what you owe (mortgage)

At first I thought it meant that if you pay for a RE purchase using your LOC, the LOC can only fund 75-80% of the cost of the place you`re buying. But that`s not true, right? Am I right in thinking I can put 100% of the purchase on my LOC -- ie use the LOC for the deposit, downpayment and balance? I`m hoping/planning to use my LOC this way soon. I`m not sure if you can pay for a property in full with a LOC...I`d be interested to know the answer to that as well...but why would you?

By the way, thanks for the link.

I answered some of your questions in red.

If you can use your LOC to actually purchase a property in full, then your either sitting on alot of equity or the property your buying is inexpensive, compared to your LOC property.

When you have a LOC on a property, the max that lenders will give you is 80% of the value(unless you can find better). However, if you have a mortgage on the same property, they won`t give you 80% of the value...but rather, the difference between 80% of the value and what you owe.

So here`s an example. You have a property worth $100,000.00 and you have a mortgage of $50,000.00. The bank has put an 80% LOC on the property. You can access $100,000.00 x 80%= $80,000.00 - $50,000.00= $30,000.00.

 

[holymoly]

QUOTE (JoefromTO @ Oct 14 2009, 03:08 PM) If you can use your LOC to actually purchase a property in full, then your either sitting on alot of equity or the property your buying is inexpensive, compared to your LOC property.
I guess, both. My principal home is paid off and I have a secured LOC on it. I`d like to buy a property that costs about 2/3rds of what`s available through my LOC. I like the idea of using the LOC for 100% of it if that`s possible, because I`ll have the option of making interest-only payments and because I can`t really spare the cash for a down payment now (or at least I`d rather not take it away from other needs).

I did use the LOC to buy a cottage in the past, but the ownership structure of our cottage is different -- a sort of buying-a-share type of thing, and not eligible for a mortgage -- so I`m not sure if it gets more complicated when you`re buying a `real` property.

Thanks for the answers, Joe.

 

[Thomas Beyer]

QUOTE (holymoly @ Oct 14 2009, 11:03 AM) At first I thought it meant that if you pay for a RE purchase using your LOC, the LOC can only fund 75-80% of the cost of the place you`re buying. But that`s not true, right? Am I right in thinking I can put 100% of the purchase on my LOC -- ie use the LOC for the deposit, downpayment and balance? I`m hoping/planning to use my LOC this way soon.
most banks require proof of down payment i.e. where is the 5% to 25% cash as down payment coming from ?

If you say: it is a LOC from this 2nd property over here .. most banks require this money in your bank account THREE (!!!) months prior to mortgage application .. and soem say: "no, you can`t" ..

But generally, yes, you can use LOC from another property to fund a new purchase.

 

[holymoly]

QUOTE (thomasbeyer2000 @ Oct 14 2009, 04:10 PM) most banks require proof of down payment i.e. where is the 5% to 25% cash as down payment coming from ?

If you say: it is a LOC from this 2nd property over here .. most banks require this money in your bank account THREE (!!!) months prior to mortgage application .. and soem say: "no, you can`t" ..

But generally, yes, you can use LOC from another property to fund a new purchase.

Thanks, Thomas.

Sorry to belabour the point, but... What if you aren`t applying for a mortgage? Can you just write a LOC cheque for the whole thing and that`s it -- without the LOC bank even knowing what you`ve used those funds for?

 

[Thomas Beyer]

QUOTE (holymoly @ Oct 14 2009, 01:46 PM) Thanks, Thomas.

Sorry to belabour the point, but... What if you aren`t applying for a mortgage? Can you just write a LOC cheque for the whole thing and that`s it -- without the LOC bank even knowing what you`ve used those funds for?
of course !

It is YOUR LOC .. so buy a boat, a new Mercedes, and 2 investment properties .. or better: all 4 (the latter 2 to pay for the first 2) !!

 

[holymoly]

QUOTE (thomasbeyer2000 @ Oct 14 2009, 06:46 PM) of course !

It is YOUR LOC .. so buy a boat, a new Mercedes, and 2 investment properties .. or better: all 4 (the latter 2 to pay for the first 2) !!

Thanks, good to know!

 

[paulrduchesne]

QUOTE (JoefromTO @ Oct 14 2009, 03:08 PM) I answered some of your questions in red.

If you can use your LOC to actually purchase a property in full, then your either sitting on alot of equity or the property your buying is inexpensive, compared to your LOC property.

When you have a LOC on a property, the max that lenders will give you is 80% of the value(unless you can find better). However, if you have a mortgage on the same property, they won`t give you 80% of the value...but rather, the difference between 80% of the value and what you owe.

So here`s an example. You have a property worth $100,000.00 and you have a mortgage of $50,000.00. The bank has put an 80% LOC on the property. You can access $100,000.00 x 80%= $80,000.00 - $50,000.00= $30,000.00.

Awesome. I`m beginning to understand. If I didn`t get my mortgage through the bank, but through a broker/lender, is this still possible? .. or does everything have to be through the bank?

 

[JoefromTO]

QUOTE (paulrduchesne @ Oct 14 2009, 10:37 PM) Awesome. I`m beginning to understand. If I didn`t get my mortgage through the bank, but through a broker/lender, is this still possible? .. or does everything have to be through the bank?


The money still comes from a bank. Brokers do alot of work to assess your current situation and then shop around to find you the best deal. They usually ask you a series of questions to evaluate your needs, or what your looking for. This helps to know which bank will have what your looking for.

You can also go into a bank yourself and negotiate a deal, but if your not sure what to ask...that`s where brokers come in.

I would suggest you at least try on your own. If you really don`t know the whole process of getting money from a bank, go to one and have them explain the process to you. It would be good for you to do this...so you can appreciate the work that brokers do. Also, its just generally a good idea to get your feet wet, so to speak.

There`s many aspects of a mortgage, aside from the rate they offer you. You will find that once you have visited a couple banks, you will start to understand the kinds of questions you need to be asking.

Brokers are there to represent you. They are typically paid by the bank so it doesn`t cost you anything to use a broker. Besides, once you get to the "wall" everyone speaks of, you will need a quality broker more than when you first start.

 

[evanwright]

QUOTE (holymoly @ Oct 14 2009, 08:43 PM) Thanks, good to know!

Of course if your banker is on top of things and notes a large cheque/withdrawal from your LOC, he/she will ask about the use of the funds. If your bank is conservative, they may `call in` your LOC, thus forcing you to transfer the balance to a mortgage on the initial property you borrowed against ... you`re then ultimately going to go through a mortgage-type application process anyway. You may say, "they can`t do that!" .. well, yes they can. The point being that you should have a back-up plan i.e. an exit strategy on the newly purchased property that will cover your borrowing in any case scenario.

 

[holymoly]

QUOTE (evanwright @ Oct 20 2009, 12:53 PM)
Of course if your banker is on top of things and notes a large cheque/withdrawal from your LOC, he/she will ask about the use of the funds. If your bank is conservative, they may 'call in' your LOC, thus forcing you to transfer the balance to a mortgage on the initial property you borrowed against ... you're then ultimately going to go through a mortgage-type application process anyway. You may say, "they can't do that!" .. well, yes they can. The point being that you should have a back-up plan i.e. an exit strategy on the newly purchased property that will cover your borrowing in any case scenario.




I had no idea this might happen. Thanks for the heads-up!

 

[Thomas Beyer]

QUOTE (evanwright @ Oct 20 2009, 09:53 AM)
Of course if your banker is on top of things and notes a large cheque/withdrawal from your LOC, he/she will ask about the use of the funds. If your bank is conservative, they may 'call in' your LOC, thus forcing you to transfer the balance to a mortgage on the initial property you borrowed against ... you're then ultimately going to go through a mortgage-type application process anyway. You may say, "they can't do that!" .. well, yes they can. The point being that you should have a back-up plan i.e. an exit strategy on the newly purchased property that will cover your borrowing in any case scenario.


True .. in theory .. rarely will banks do that .. so it is important to "use" the LOC once in a while.



Say, the LOC is $100,000. Write a cheque once in a while for various amounts, say $22,000 .. then pay it back a few days later .. then $35,000 .. pay it back a week later .. then $1065 .. pay it back 10 days later .. then $87,000 .. pay it back one day later ..



see what happens ! Likely: nothing .. just a few pennies or dollars of interest charged !!

 

[JoefromTO]

QUOTE (thomasbeyer2000 @ Oct 20 2009, 06:48 PM) True .. in theory .. rarely will banks do that .. so it is important to "use" the LOC once in a while.

Say, the LOC is $100,000. Write a cheque once in a while for various amounts, say $22,000 .. then pay it back a few days later .. then $35,000 .. pay it back a week later .. then $1065 .. pay it back 10 days later .. then $87,000 .. pay it back one day later ..

see what happens ! Likely: nothing .. just a few pennies or dollars of interest charged !!


That`s exactly how people can build or rebuild their credit. For those who have no credit, or who have claimed bankruptcy, getting access to credit, like a credit card, using some of it when you don`t really need it and paying it back in time is a great way to rebuild credit history. Just be sure to pay off the FULL balance, because the credit cards companies charge interest on the entire monthly amount, not the balance of whats owing after you pay the minimum required...I found out the hard way and have met alot of people who didn`t know this fact as well.

 

[nubiwan]

Say I bought a dumper house nobody wanted real cheap, let`s say $100K when it was probably worth 170K. I stick in about $50K of renos, and get it apprasied perhaps year or 2 later. It is now worth $260K on appraisal. Bank will let me borrow 80% of that appraised value (OAC) or $208K less the mortgage balance (lets say $98K now), so I now have $110K to go invest in other property. If I am on a variable rate, then that same rate may be extended to the HLOC. What`s mroe, I might only have to pay the interest component of that HLOC unitl I get the new investment property refinanced with it`s own mortgage. I might just keep a house on the HLOC because it cashflow`s pretty good.

 

[AndyLuchies]

QUOTE (holymoly @ Oct 14 2009, 03:21 PM) I guess, both. My principal home is paid off and I have a secured LOC on it. I`d like to buy a property that costs about 2/3rds of what`s available through my LOC. I like the idea of using the LOC for 100% of it if that`s possible, because I`ll have the option of making interest-only payments and because I can`t really spare the cash for a down payment now (or at least I`d rather not take it away from other needs).

I did use the LOC to buy a cottage in the past, but the ownership structure of our cottage is different -- a sort of buying-a-share type of thing, and not eligible for a mortgage -- so I`m not sure if it gets more complicated when you`re buying a `real` property.

Thanks for the answers, Joe.

I was under the impression that Real Estate is such a great investment because of the leveraging capabilities (paying 10% down gives me 30% ROI instead of paying 100% down and getting 3% ROI). Its the only investment that banks will give you their money for....why don`t you want to leverage out?
Its rarely a problem (in my brief Real estate experience) to use a Home Equity Line of Credit as a down payment. That`s how I bought my last property with no lender issues. This allows me to use my one HELOC to buy several properties at 20% down instead of buying 1 property at 100% down.

You don`t need cash for a downpayment, you can just use your HELOC as the downpayment, especially if you don`t already have many rental properties, it should be easy.... is there something I`m missing?

why don`t you save the rest of your LOC and only use part of it for this next property as a downpayment? (perhaps a LOC secured against your house is different from a HELOC?? if so, transfer it over)