Board Topic: Purchase w/ 2nd loan Heloc
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Purchase w/ 2nd loan Heloc

Posted by: Jeff Apr 30 2004, 02:36 PM
Hi, I am purchasing a condo for $92,500 and was interested in doing an 80/20 loan with the 2nd loan (the 20%) being a Heloc and the 1st being fixed over 30yrs. Is the Heloc a good idea for the 20% or should I look for something fixed? I think the Heloc's terms are 360 months but I think at the ten year mark it refi's. I do know that the Heloc would be Prime + .5 until year 10 and you can pay interest only if you would like. I really don't know much about Heloc's (as you can probably tell) so I apologize if I haven't included all necessary information. I guess I'm still not sure what happens to it after 10 years and if these are typically good loan options on the 20%. Thanks in advance for any help.

Posted by: loanuniverse Apr 30 2004, 06:16 PM
Jeff:

I am not a residential lender, but it happens that there are more people in the internet looking for residential products than commercial lending advice so I get a lot of traffic for those products. I don’t mind sharing what little I know on this area, but take into consideration that this is not my area.

HELOC stands for “Home Equity Line of Credit”. The product that you seem to be looking at to finance the additional 20% that you will need for the purchase seems to be a hybrid that allows for interest only during the first ten years before it turns into an amortizing loan {principal and interest payment}.

In my opinion, the idea of a variable rate sounds fine at the moment because prime is low at 4%, but I remember doing commercial loans using 9% prime about four years ago. I wouldn’t like to be exposed as a borrower to the potential interest risk {rates going up} that a variable rate will expose you to.

On the other hand, it is an issue of practicality. You are essentially buying this condo with no money down so that does sound like a good deal. A quick thought…. Have you taken a look at FHA loans? Would you qualify for one of those? I know that they have programs with very low down payments. Then again 5% down payment is much higher than 0%. I think that your options for financing the 20% portion are limited, and that the HELOC might be a good deal in this situation since the exposure is limited. Lets say that one year from now prime is back at 9%, this would represent an additional $50 a year for every $1,000 borrowed. On an $18,000 balance that is $900 a year.


You should look into the HELOC and see if it has a rate cap? {as in the rate can not go over a certain percentage}. If it does, your risk decreases.

Good luck.
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