Using a Heloc as a downpayment on a new home

[Golden sunsets]

Has anyone done this? In this real estate environment where one can't really sell their current home and then look for the next home, does it make sense to set up a HELOC, use the proceeds as a downpayment on the next home and then pay off the heloc as soon as the first home sells? Has anyone done this?

 

[MRG]

We did something similar 6 years ago, no intermediate mortgage. Our home with the HELOC didn't close for another 3 months. When it closed puff the loan was gone.

 

[Aerides]

I think I read that you can't sell a home with an active HELOC on it, your bank will require it be repaid before you can close, not after? But may depend on your bank and contract.

 

[Golden sunsets]

I think I read that you can't sell a home with an active HELOC on it, your bank will require it be repaid before you can close, not after? But may depend on your bank and contract.

DS is the one who wants to do this. One of the banks he's looking at states in their HELOC literature, that the proceeds of a HELOC loan can not be used to buy a different primary home. Perhaps the situation you state above is the reason.

 

[Winenot]

I think I read that you can't sell a home with an active HELOC on it, your bank will require it be repaid before you can close, not after? But may depend on your bank and contract.

This might be policy of a specific bank. In general, however, the HELOC would be paid off at closing by the settlement agent just like any other loan against the property.

 

[Winenot]

Something to consider…I sold/bought a home several years ago in a hot market. The sale of my house was contingent upon me finding another property, which I eventually did. An unintended perk of the contingency was that I had the buyers agent working just as hard as my own to find me a place. It’s a sellers market right now and buyers are willing to concede just about anything to “win”the deal.

 

[Teacher Terry]

Because our market is so hot people are selling with the condition that they can rent back for a few months so they can find a new home. In my case I was lucky enough to sell and buy at the same time. My back up plan was to move into my best friend’s house and it was a generous offer that made me feel secure and loved.

 

[OldShooter]

We're doing essentially that right now. Loan against our current lake home, building a new one, planning to sell the old one and pay off the loan. For us, the cheapest option was a standard first mortgage. About $4K fees and costs and 2.875% interest rate/30 year. It was a huge PITA because of the documentation demands but no major obstacles or excitement. Shop around, fees and rates definitely vary. You are the customer, so behave like one.

A HELOC is almost certainly not an obstacle to selling. At closing, one of the closer's responsibilities is to disburse funds to pay off any encumbrances on the property, then pay the seller the balance. Encumbrances can include a first mortgage, HELOC, mechanics liens, legal judgments, etc. Lots of stuff that the title search may smoke out and HELOC is just one checkbox on the list. These payoffs are necessary for the buyer to receive a clean title.

 

[GTFan]

OP you might also want to consider a bridge loan backed by assets if you can swing it, Schwab offers one (Pledged Asset line). Cheap interest rates (~2.5%), no fees, but you ideally need at least $1mil taxable assets in brokerage with them. Other brokers like E*trade and Interactive Brokers offer same thing with cheap rates, and Fidelity/Vanguard will make margin loans at not-cheap rates if you only need the money short-term.
Essentially a margin loan on your stash, you just pay interest on the loan every month then pay it off when you sell your house.

 

[OldShooter]

OP you might also want to consider a bridge loan backed by assets if you can swing it, Schwab offers one (Pledged Asset line). Cheap interest rates, no fees, but you ideally need at least $1mil taxable assets in brokerage with them. Other brokers like E*trade and Interactive Brokers offer same thing with cheap rates, and Fidelity/Vanguard will make margin loans at not-cheap rates if you only need the money short-term.
Essentially a margin loan on your stash.

FWIW the IRS prohibits using IRAs and Roths as collateral for loans, so that limits that option for many of us. Our IRAs and Roths have well over 10x the amount we borrowed to do our deal (post 8), but we couldn't use them for one of Schwab's loans.

 

[Winemaker]

In the many times I have purchased real estate and used a mortgage, there was always a disclosure as to where you are coming up with the funds for down payment and closing costs. In my experience, the use of a HELOC or any borrowed monies is VERBOTEN. And they especially hate it when you come up with $5k or $10k that you might have in a safe or deposit box.

 

[OldShooter]

In the many times I have purchased real estate and used a mortgage, there was always a disclosure as to where you are coming up with the funds for down payment and closing costs. In my experience, the use of a HELOC or any borrowed monies is VERBOTEN. And they especially hate it when you come up with $5k or $10k that you might have in a safe or deposit box.

Yes. It's a long time since we bought with a mortgage, but I do remember inquiries about the source of the down payment. Requiring gift letters from parents, etc.

In our Post #8 case the current lake home had no mortgage before we pulled the swing loan and the new place will have no mortgage. Our main issue is to manage the IRA draws so we don't get severely wounded by the income taxes. We'll level that out over at least three years with the proceeds from selling the current place and with an unused $275K HELOC that we can use to move IRA draws from one year to the next while keeping the builder happy with progress payments.

 

[Souschef]

I opened a HELOC in 2005, and used it to buy our new home in 2007, which was much less expensive than the old one.
When I sold my old home, part of the proceeds was used to pay off the HELOC

 

[Winemaker]

Yes. It's a long time since we bought with a mortgage, but I do remember inquiries about the source of the down payment. Requiring gift letters from parents, etc.

In our Post #8 case the current lake home had no mortgage before we pulled the swing loan and the new place will have no mortgage. Our main issue is to manage the IRA draws so we don't get severely wounded by the income taxes. We'll level that out over at least three years with the proceeds from selling the current place and with an unused $275K HELOC that we can use to move IRA draws from one year to the next while keeping the builder happy with progress payments.

I don't see any issues using solely a HELOC to purchase or build, other than interest rate fluctuations. Today's rates are pretty low, and may be higher in the next few years. Or not, now that QE has been discovered.

 

[Deej]

We haven't used our HELOC yet, but, are set up to do so when the time comes. We took out a HELOC in 2017 just before or after (I forget which) paying off our mortgage at the suggestion of our "then" accountant, which we felt made sense. Our HELOC sits untouched. We were hoping to move in the next few years when this market corrects itself. In any event, I know our current house will sell within a week or less as they all sell very quickly in our 'hood, even before Covid. So, we will rely on it to pull us through on a house we choose later.

 

[Ronnieboy]

I had a plan of getting a loan from the local credit union to build on a lot we have purchased then once that was complete - move into said new home and sell current home. Then using the proceeds to pay off mortgage on previous home and hopefully if there is enough equity the new home, if not, pay mortgage on new home.

I say had because we are not at that point and I am not sure if such a thing is possible.

I realize that we would be paying on both new construction loan and current mortgage at the same time and hopefully only month of moving/fixup time for the current home.

 

[Golden sunsets]

Hi OP here. Just to be clear DS has a mortgage on house number 1, with about a 60% loan to value ratio(after sales commission). Drawing down 50% of that equity via a Heloc plus an equal amount that they have in cash, would fund a 20% downpayment on the new property, which would be worth around twice the value of property #1(factoring in closing costs on both homes). He feels that joint cash flow of he and DIL more than justifies carrying both homes. But they want to sell home#1 after buying home#2, pay off first mortgage and Helo on number 1 and replenish cash. Tapping part of the equity in house #1, would be preferable to liquidating investments, as a means of generating the extra money needed for the 20% downpayment.