There is a lot of interest in Home Equity Lines of Credit (HELOCs) right now. I think this is due to the fact that interest rates are going up so much and people are trying to avoid refinancing. Here’s a quick explanation of why I like lines of credit.
HELOC vs Business LOC
Similar to other loans, there is a residential side and a commercial side. If you are looking to do repairs on your primary residence, then the HELOC is the thing for you. Call your banker and ask about this product. If you are looking to buy a property and use the equity in your primary residence, then it’s still a HELOC you want. The credit line is attached to the property and related to whatever loan it has.
If you already own an investment property, then what you want is a business LOC, also known as a commercial LOC. You’ll need to ask for the commercial banker to discuss these.
They work very similar to a HELOC. You put the equity you have in the property as collateral for the loan. The commercial LOC will have a higher interest rate due to the slightly increased risk the bank has – it’s harder to walk away from your primary home than it is from an investment property. The credit line will usually have a variable rate rather than fixed. You will have to pay an annual maintenance fee and you will need an appraisal every few years.
How to Find a LOC
It all depends on what mortgage, if any, you currently have on your property. If you have a mortgage, then that bank will have first lien. A lien is a claim against property. A property can have multiple liens and they have an order (first, second, third…) It can get complicated how various states order liens, but generally, the first mortgage on the property will be the first lien.
The order is unimportant unless you default. That means you stop making payments. The bank can then foreclose and take possession of the property. That’s their only recourse usually. If they can’t do that, then they are basically giving an unsecured loan, and for this much money, that rarely happens. When the creditors are payed back after a foreclosure, it goes in order of liens. When the money is gone, the other creditors get less, or nothing. Having anything other than first lien is a much bigger risk. And right now, with interest rates so high and inflation increasing, lenders have more risk that they won’t get paid back. Bottom line is that they only want to have first lien. This is why you’ve probably called around to banks and they have said they won’t give you a line of credit.
If you do want the HELOC, then talk to the residential banker at the bank that has your mortgage. If you want a business LOC, then talk to the commercial banker at the same bank. If you own the place outright, congratulations to you – banks will fall all over themselves to give you a line of credit.
Here’s my strategy to leverage lines of credits to BRRRR your properties.