HELOC Investing Strategy November 23, 2008Posted by W. Keoki McCarthy in Invest, market conditions, real estate, real estate investing, REO.
I went online today and saw that HELOC’s (home equity line of credit) are floating at around 4%. That is really low. Most HELOC’s are tagged to the prime interest rate. So, as long as the fed thinks our economy needs a cash infusion and there is not alot of inflation, prime is going to stay really low. Does this mean that it will be 6 months 1 year 3 years? I do not know. However, I do not see the economy recovering quicker than a year so I think it is a safe bet that it could be at least a year.
Now, how does that help you? Well, consider this, if you buy a rental home and you put down 20% cash and get a loan you will pay about 6.5% interest on a 30 year fixed (just a rough guess this does not constitute an offer of a rate). Now contrast that with putting 20% down and financing the rest with a HELOC. Here is the difference. On a $300,000 purchase price putting 20% down The 6.5% interest rate will have your monthly payment at $1516. The 4% HELOC will be at $1145. The HELOC is 25% less per month.
What are the benefits?
1st The HELOC is 25% per month cheaper possibly allowing you to have positive cashflow with only 25% down.
2nd When you do not have to have a financing contingency (with a HELOC you have the money in hand before you make the offer) you can be more aggressive with your offer because the seller knows you are buying and not hoping for a loan. I have seen that get a buyer an additional 10% discount on an offer.
3rd most likely when HELOC’s start rising in cost, it will be because the economy is doing much better. That would allow you to refi or maybe even sell for a profit.