What’s So Great About HELOCs?
Hello Cash Flow Community!
As promised we are continuing our discussion about my favorite Debt Weapon™: Home Equity Lines of Credit, by sharing with you their 3 biggest disadvantages. Check out this video if you missed my last email where I described the advantages of using HELOCS.
Now before I expose the unattractive qualities of HELOCS I wanted to share one more story that illustrates how they can be such a powerful type of Debt Weapon™ to have in your financial toolbox. You see, last summer the rental lease was expiring on my free and clear rental property in Morrison, Colorado and I decided (for very obvious reasons) not to renew the lease with those tenants. After the tenants moved out and left me with one of the biggest disasters I’ve ever seen in any home, there was not only a lot to clean up but also quite a lot of necessary repairs.
Was I worried about the cost? Nope! Having the HELOC available to use on the extensive cleanup and repairs took away the stress that can come from having to do such a large project as quickly as possible. Being able to use the HELOC for those projects actually ended up saving me money because I was able to move quickly and get it rented out with minimum downtime. I’m happy to report that the house was quickly rented to some excellent tenants for a higher rental income source than before.
Ok, now there are some things to be aware of with Home Equity Lines of Credit before you go shopping around for them as I wanted to share the 3 biggest disadvantages of them since not every Debt Weapon™ is absolutely perfect.
You ready? Let’s dive in…
Reason 1: Adjust Based On The Prime Rate.
HELOCS are attached to the prime rate and are always adjusting. Therefore if you have a large balance on this credit line and economic conditions change, you could potentially find yourself facing a 20%+ interest rate instead of the lower rate you had prior. In other words, this Debt Weapon™ can offer little control when things outside of your control happen.
Reason 2: Account Freeze In A Downturn.
Your lender could freeze your HELOC in the event of an economic downturn. For example, when the last recession hit in 2008 all 3 of my HELOCs were frozen while none of my non-secured Debt Weapons™ were. Sounds a bit crazy, right? Well, after I thought more about it, it does make more sense due to the recession substantially affecting home values. As home values were plummeting the banks didn’t want owners borrowing more money on their home equity lines of credit - especially if they are or could quickly find themselves under water with the 1st position mortgage. That’s not a good place to be for anyone!
Reason 3: Non-Owner Occupied Non-Starters.
Home equity lines of credit are very hard to get against non-owner occupied properties with a 1st position mortgage against it. Even my aforementioned free and clear rental property had the bank saying no to a HELOC since it was still considered a non-owner occupied property. A frustrating experience, considering the fantastic relationship I had with that specific bank, not to mention my excellent credit scores as well.
But… If you are just starting out in Real Estate Investing then I would recommend that you avoid relying on getting approved for and using a HELOC in order to buy your first investment property - especially if you are planning on renting it out for the cash flow. Not saying it can’t happen, but don’t count on it.
Well there you have it my friend! I hope you find this information helpful when looking into whether or not a Home Equity Line Of Credit would be a good fit for your financial goals.
Be on the lookout for next week's email where I am going to explain the importance of Debt Weapons™ - why you should have them and what can you do with them once you've got 'em! I'm confident these financial power tools will become your new BFF (Best Financial Friend) and you can get a head start on that financial friendship right here. Til next time…
Onward and Upward,
Matthew Pillmore and everyone at VIP Financial Education