HELOC converts to 15 yr fixed loan - idea for use - Posted by Steve Parker

Posted by Steve Parker on June 12, 2004 at 24:34:00:


Please help me find the flaw in this financing concept-- or I’ll race you to the bank to start cranking these out!

Bank of America (and presumably other banks) offers a home equity line of credit that can be converted to a fixed interst loan with a simple written request. As of today, I can convert my 4.0% HELOC to a 6.0% fixed loan but with a 15 year amortization. There are zero costs to open the HELOC, zero costs to convert it to fixed, and no pre-pay.

Here’s the interesting twist - my banker told me they’ll do the same thing on a 1-4 unit non-owner occupied property – up to 80% LTV with a new appraisal. This loan stays in their portfolio so it’s not subject to seasoning issues, Freddie/Fannie restrictions, or even how I hold title. (Title in LLC is OK with a personal guarantee on top of the property lien).

To put this banking product to use, assume you have three things: 1) good personal credit, 2) a deal with excellent cash flow – enough to comfortably support a 15 year amortized loan at 80% LTV, and 3) access to cash and/or equity in a property that in total is enough to pay 100% cash for your above deal.

Here’s the process to fast, cheap, flexible non-owner occupied financing given the above assumptions:

  1. Use the equity in an existing property and/or cash on hand to pay 100% cash for the new deal including any rehab or repairs required.

  2. Once closed and rehabbed/rented, get a new appraisal and take out up to an 80% HELOC on this property. If you truly created over 25% equity from buying right and rehabbing, the new 80% LTV HELOC will equal or exceed the total cash you have in the deal.

  3. Convert the new HELOC to a 15 year fixed rate if you plan to buy & hold long term. Leave as is if you’re flipping to minimize carrying cost.

  4. Use that cash from this new HELOC to pay off the original HELOC and/or replentish the cash reserve used to buy your deal.

  5. Find another deal and repeat the process.

Key benfits as I see them:

  1. Interest rate is well below a non-owner occupied fixed rate for same amortization period (Cheaper money!)

  2. Much lower closing costs - no points, origination fees, application fees, or lender driven junk fees.

  3. Avoids seasoning requirement for the cash-out loan against the post-rehab ARV appraisal. (Buyer still may have a seasoning issue if flipping it).

  4. Speed - could close in days rather than weeks both when buying your deal and when cashing out via the new HELOC.

  5. 100% cash offers with fast closes allow negotiating better deals, so buying right becomes easier.

There are some big potential drawbacks including putting your homestead at risk and ending up over-leveraged and personally liable if you don’t manage your business properly. The starting point of having enough $$/home equity to pay 100% cash for a deal may be unrealistic for some investors as well. Please ignore these type concerns for now and help me poke any holes in the financing process and benfits – is it really as good as it seems?

Thanks for your input!