Advice on using HELOC

[LillianHo]

I need advice on using HELOC for some RE transactions. In my last deal, I was thinking to use my HELOC to do a purchase and apply for mortgage later (the offer didn`t get accepted in the end). The reasons I wanted to do that:
1) I have a large amount of HELOC available to use at prime rate.
2) The house needed some repair, it will be vacant for a month to do it. If I use LOC at interest payment only, my negative cash flow for the vacant month will be small.
3) My closing will be more flexible, probably get better price.
4) When I get morgage after repair, bank might appraise higher in value, and I can pay less downpayment, and lend more money. (although I am not sure this part, do bank use purchase price or appraised value for mortgage?)

I need your advice. Thanks.

 

[GarthChapman]

Good plan. I used the same many times over several years to good results. Remember that some lenders are once again (as they were until a few years ago) not financing equity take-out mortgages on properties that you have held for less than 1 year - so not to close the door but be aware that your lender options will be a bit narrower.

 

[Thomas Beyer]

yes, this makes sense ...

especially getting a better price on an UNconditional purchase .. and to add a higher mortgage later if this is your objective ...

 

[RobMacdonald]

Hi Rena,

Perfectly good plan, and you`re not in a time crunch with the way lenders are reacting these days. It gives you great flexiblity and if you are able to improve the property, you`re right that you may be able to pull more out of it. Potentially, your seed capital could last longer and you can get closer to your end goal.

And I echo Thomas, gives you great bargaining power when purchasing.

 

[LillianHo]

Thanks all for your input. I used to work in a bank, I remember they use purchase price or appraised value whichever the lowest one to mortgage a property. Am I right? If that`s the case, how long do I need to hold in LOC to let them use appraised value to mortgage?

 

[RobMacdonald]

Hi Rena,

Every bank will have different rules around this. Some like Firstline will requre you to own the property for 12 months prior to refiancing. That seems to be the way most lenders are going. Alot will depend on the strength of your application, how may properties your own, and the circumstances of the purchase.

The appraisal will say alot. If the value has gone up alot, the lender may not be comfortable with the full value. The lending area will make a difference as well. A bigger centre will provide more strength in the appraised value.

 

[mortgageman]

QUOTE (rena98 @ May 21 2009, 11:49 AM) Thanks all for your input. I used to work in a bank, I remember they use purchase price or appraised value whichever the lowest one to mortgage a property. Am I right? If that`s the case, how long do I need to hold in LOC to let them use appraised value to mortgage?

Yes, a bank will always lend on the lower of the purchase price or the appraised value.
There wouldn`t be a time requirement for ownership per se. Buy the place for the best price possible, do smart renovations that maximize value and then start the refinance process. Assuming conventional financing, once your refinance application is approved one of the financing conditions will be that an appraisal is done on the property. If the appraisal comes in lower than your estimated value the bank will only lend on the appraisal value.
Good luck!