What is better: a mortgage or a line-of-credit ?

Thomas Beyer

Senior Forum Member
REIN Member
What is better: a mortgage or a line-of-credit (LOC).

A LOC MAY have advantages over a mortgage:
a ) it is more flexible as it is usually interest only
b ) you can prepay any amount, and withdraw it later,
c ) it has no "forced" principal reduction component,
d ) it has potentially lower, usually 0, upfront fees.
e) it can be up to 75% of the value of your property, behind a mortgage

A mortgage MAY have advantages over a LOC:
a ) the interest rate may be lower, or
b ) you can get a higher loan-to-value (if this is what you want), up to 95% or even 100%, or
c ) it can be a fixed interest rate as opposed to a variable prime based LOC.

Always always get a LOC when you do not need it. Don`t wait until you`re disabled or unemployed or have that awesome deal in front of you .. and need cash .. as the bank may not give it to you.

Some banks even allow you to have a LOC behind a mortgage with the LOC increasing as the mortgage decreases, for a total fixed amount.

Analyze pro`s and con`s .. then decide !

Any serious investor should have their LOC maxed out .. even if you don`t need it .. it costs nothing until you tap into it !!
 

Nir

New Forum Member
REIN Member
Hello Thomas,

Your comments on different topics are highly appreciated. I`m learning a lot from experienced investors like you.

Not sure you`ll know the answer to the following question as it`s a unique situation but I`ll try anyway, maybe someone else is interested to know as well:

When transferring a mortgage from one bank to another after the 5 years term is over (i.e. from TD to RBC), does the bank usually require that you also pay any balance in a home equity line of credit account you have with the previous bank (based on the same property) or are Home Equity LOC and mortgage 2 "separate entities" and therefore it is ok to have a mortgage with one bank and line of credit with another although they`re both based on the same property? THANKS.
 

RedlineBrett

Senior Forum Member
REIN Member
QUOTE (thomasbeyer2000 @ Jan 7 2008, 07:03 PM) Always always get a LOC when you do not need it. Don`t wait until you`re disabled or unemployed or have that awesome deal in front of you .. and need cash .. as the bank may not give it to you.

Some banks even allow you to have a LOC behind a mortgage with the LOC increasing as the mortgage decreases, for a total fixed amount.

Analyze pro`s and con`s .. then decide !

Any serious investor should have their LOC maxed out .. even if you don`t need it .. it costs nothing until you tap into it !!

Some of the best advice I have ever been given was `borrow when you can, not when you need to`. Having access to borrowed funds on a short term has definitely helped my business!
 

RobMacdonald

New Forum Member
Registered
QUOTE (investmart @ Jan 8 2008, 01:28 AM) Hello Thomas,

Your comments on different topics are highly appreciated. I`m learning a lot from experienced investors like you.

Not sure you`ll know the answer to the following question as it`s a unique situation but I`ll try anyway, maybe someone else is interested to know as well:

When transferring a mortgage from one bank to another after the 5 years term is over (i.e. from TD to RBC), does the bank usually require that you also pay any balance in a home equity line of credit account you have with the previous bank (based on the same property) or are Home Equity LOC and mortgage 2 "separate entities" and therefore it is ok to have a mortgage with one bank and line of credit with another although they`re both based on the same property? THANKS.

Hi,

This will depend on the way that your original mortgage was registered. In most cases today, the mortgage and LOC are wrapped up into one account, like the Scotia STEP or Firstline HELOC etc. So in this case you would have to payout the LOC balance.

However, if you are in a situation where you have a first mortgage with TD for example, and a second mortgage as a LOC, you may not have to pay out the line of credit. If you transfer your first mortgage, or a switch mortgage as its called, you will not have to pay out the second mortgage. Be careful though.... a `true` switch means the new institution takes over the existing mortgage and there is no change to the current balance, amortization, payment amount etc. Any increase to any of these aspects would require a priority agreement to be signed by the second mortgage holder.

Hope that helps.
 

Thomas Beyer

Senior Forum Member
REIN Member
LOC and first mortgage are usually 2 different legal instruments .. hence, yes, if you pay out the first the LOC stays in place (but automatically gets pushed into 1st position) .. thus, when you get a new 1st mortgage (i.e. a switch) the LOC holder has to allow a postponement of their now 1st position to the new 1st mortgage via a postponement caveat ...
 

samcansam

New Forum Member
Registered
Another angle you may want to look at it: The LOC would appear on your credit report, hence it will lower your credit score and may impact your ability to get other loans. I`m telling this from a practical experience as I had to switch from LOC to mortgage to get 75 points back.

Good luck,
Mike
 

kanabel

New Forum Member
Registered
QUOTE (samcansam @ Jan 8 2008, 09:13 PM) Another angle you may want to look at it: The LOC would appear on your credit report, hence it will lower your credit score and may impact your ability to get other loans. I`m telling this from a practical experience as I had to switch from LOC to mortgage to get 75 points back.

Good luck,
Mike

Mentioning this case I have to ask a question with somewhat this matter: Why some mortgages appear on credit report and some not? I had a case where RBC mortgage was invisible, while BMO is normally on the report? Does it matter that in first case it was fixed (RBC), but in second (BMO) open variable? Or just another reasons?
 

GarthChapman

Frequent Forum Member
REIN Member
QUOTE (kanabel @ Jan 8 2008, 10:09 PM) Mentioning this case I have to ask a question with somewhat this matter: Why some mortgages appear on credit report and some not? I had a case where RBC mortgage was invisible, while BMO is normally on the report? Does it matter that in first case it was fixed (RBC), but in second (BMO) open variable? Or just another reasons?


As I remember this - interest only Line of Credit mortgages appear on your credit report.
 

RobMacdonald

New Forum Member
Registered
Yes, most LOC`s will appear on the credit report, and being that the account is generally used for investments, it normally is at or near it`s credit limit. This will affect your credit score. But it is very rare that this factor alone will drive your credit score into substandard categories. A score of 680 is very good in today`s standards, and a score of 620 still gets you into most mortgage products without question.

It`s an interesting issue about why some lenders mortgages will report on the bureau and some don`t. What I`ve been told is that there is no legislation, so it`s come to the major banks just deciding when they are going to all report. I think it`s a `wait and see` answer at the moment. I wasn`t aware that BMO was reporting, but it`s as much a card game as anything. The moment all institutions mortgage report on the bureau, that`s the same moment that competition in the mortgage industry will heat up any further. Every credit application will identify other targets for cross-sell and prospecting.
 

Thomas Beyer

Senior Forum Member
REIN Member
30, 40 or (maybe) 50 year amortization mortgages are now possible as well .. they are like INTEREST ONLY mortgages, or a line-of-credit (LOC)
why not .. if you are sure that there is equity upside ..

paying down the mortgage is like saving money at 5% .. usually you can do better with real estate so the mortgage paydown has little value to a serious real estate investor
.. and benefits primarily the bank as it reduces their risk !
 

UTCVenturesLtd

New Forum Member
Registered
30, 40 or (maybe) 50 year amortization mortgages are now possible as well .. they are like INTEREST ONLY mortgages, or a line-of-credit (LOC)
222 I guess after 50 yrs then the next generations will have to continue the interest payments and no one will ever own it. It sounds almost like renting except the property value over time will have increased a lot as well and the principle amount will look much smaller.

why not .. if you are sure that there is equity upside ..

paying down the mortgage is like saving money at 5% .. usually you can do better with real estate so the mortgage paydown has little value to a serious real estate investor
.. and benefits primarily the bank as it reduces their risk !

222 This is an area that goes against i guess what my parents taught about being out of debt. I have no problem leveraging deals using a line of credit, but not for long term. I like it paid down or out and then look for the next deal. If we ever had a sub prime type of crisis or a major downturn, i could just say "oh well" instead of having debt higher than what the property would be worth then. I would be in a position to use the line of credit to go after new lower priced deals. I look at it as paying down the mortgage is worth much more than 5% since you are using "after tax dollars" to do it.

It is very common for investors to have no problem with acquiring high debt loads. I guess for me at the moment til i know more, i would rather pay the tax man than interest to the bank. A high debt load carries a lot more risk that if something goes wrong, you can go bankrupt. And we all have had experience with "Murphy`s Law".
Dean
ve6eee@yahoo.com
 

Thomas Beyer

Senior Forum Member
REIN Member
paying down the mortgage is like saving money at 5% .. usually you can do better with real estate so the mortgage paydown has little value to a serious real estate investor .. and benefits primarily the bank as it reduces their risk !

222 This is an area that goes against i guess what my parents taught about being out of debt. I have no problem leveraging deals using a line of credit, but not for long term. I like it paid down or out and then look for the next deal. If we ever had a sub prime type of crisis or a major downturn, i could just say "oh well" instead of having debt higher than what the property would be worth then. I would be in a position to use the line of credit to go after new lower priced deals. I look at it as paying down the mortgage is worth much more than 5% since you are using "after tax dollars" to do it.

It is very common for investors to have no problem with acquiring high debt loads. I guess for me at the moment til i know more, i would rather pay the tax man than interest to the bank. A high debt load carries a lot more risk that if something goes wrong, you can go bankrupt. And we all have had experience with "Murphy`s Law".
Dean - ve6eee@yahoo.com
http://mailto:ve6eee@yahoo.com


Well, it depends of course on your risk tolerance. Also, not everything your parents taught you is perhaps correct today.

It also depends on the interest rates. At 4-6% annual interest costs and 4-6% annual inflation, it is essentially FREE money .. so why not take as much as you can ?

re-read Robert Kyasaki`s "Rich Dad - Poor Dad" book and the chapter on good debt vs. bad debt !

Essentially: good debt is debt to acquire APPRECIATING assets like real estate, and bad debt is for depreciating assets such as a car, shoes, furniture, a boat, a vacation ..

So, if you buy a real estate asset for $500,000 with $100,000 cash and $400,000 mortgage, and assuming the asset can sustain that interest payment of say 6% or $24,000 annually .. what is the value of the mortgage paydown ? Very little .. in essence just a safety cushion .. but if in 5 years, instead of paying 5*$24,000 or $120,000 to the bank, you could buy ANOTHER asset worth $500,000 .. is this not better ?

This of course assumes
a) the market is going up
b) the income from the real estate asset covers the debt obligations by a wide margin

re a) this is the assumption in any real estate you buy, as it goes up, ON AVERAGE .. otherwise: don`t buy ..
and b) this is how you get a mortgage in the first place .. the bank assesses the risk and the margin and then lends you money ..

and yes, if interest rate are very high and you are very risk averse .. then no debt is better !

Nothign ventured .. nothing gained .. more ventured (i.e.e borrowed) .. more gained .. if done prudently obviously ! I don`t encourage huge, high interest rate debt on an asset with too little income in a flat or even falling market ..

However: we live in INLFATIONARY TIMES .. so cheap / free money is the way to go with a REAL (icnome producing) asset !
 

invst4profit

New Forum Member
Registered
It is very common for investors to have no problem with acquiring high debt loads. I guess for me at the moment til i know more, i would rather pay the tax man than interest to the bank. A high debt load carries a lot more risk that if something goes wrong, you can go bankrupt. And we all have had experience with "Murphy`s Law".


Once educated will you discover that statement is what seperates the sucessful investors from those that spend there life dreaming of being successful.
 

Thomas Beyer

Senior Forum Member
REIN Member
QUOTE (invst4profit @ Jun 18 2008, 08:15 AM) It is very common for investors to have no problem with acquiring high debt loads. I guess for me at the moment til i know more, i would rather pay the tax man than interest to the bank. A high debt load carries a lot more risk that if something goes wrong, you can go bankrupt. And we all have had experience with "Murphy`s Law".


Once educated will you discover that statement is what seperates the sucessful investors from those that spend there life dreaming of being successful.

correct .. prudent leverage is the name of the (real estate) game .. too high a debt load can cripple you .. but if (rising) income reasonably exceeds (fixed) debt load .. then borrowing appropriately to build wealth is the way to go ..
 

invst4profit

New Forum Member
Registered
I must have been day dreaming when I typed my previous statement "Once educated will you"appeares to be asking a question. What I should have type was Once educated you will
 

nubiwan

Inspired Forum Member
Registered
QUOTE (RedlineBrett @ Jan 8 2008, 12:03 PM) Some of the best advice I have ever been given was `borrow when you can, not when you need to`. Having access to borrowed funds on a short term has definitely helped my business!

Exactly what happened to me. I established a HELOC of $140K and LOC of $40K just before I got laid off in March. Since then I`ve been able to buy an investment proprty and keep myself busy renovating it, and getting it rented. My HELOC has an astounding 2.25% interest rate and I only have to pay interest. That`s like $260 for the full $140K per month.
 
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