Using HELOC for Down Payment – The Home Buyer’s Hack

If you’re like the majority of Portland Oregon homeowners you’ve considered selling your home this past year. Prices are high. But you may be apprehensive about finding a replacement home. In the current market buyers are competing against each other. This is due to the low inventory of homes coupled with historically low interest rates. Buyers with offers contingent on the sale of their home can’t compete with cash or large down payment offers.

There is a solution providing immediate liquidity without tapping into your retirement accounts or selling your personal portfolio. Home equity lines of credit (HELOC) are an under-utilized tool for home buyers that I highly recommend for my clients to obtain sooner than later as an option for using HELOC for down payment.  

The HELOC is a revolving line of credit, similar to a credit card, secured against the value of equity you have on your home. Let’s illustrate with an example: 

If your home is currently worth $500,000.
Your outstanding loan is $300,000.
Then you have $200,000 in home equity.

Just like a home mortgage a lender evaluates your credit score and history, employment history, monthly income and monthly debts before issuing the credit. 

The credit limit maximum can climb up to 85% of the value of the home minus your mortgage. Again our example:

85% of $500,000 (current value) = $425,000

$425,000 – $300,000 (loan) = $125,000 maximum HELOC amount

Using the HELOC for down payment is a great way to have immediate access to funds without a contingent offer. Cover closing costs for a new home prior to selling your existing home. This removes the stress of finding a replacement within a short window. The proceeds from selling your home later will then be used to pay off the loan. The HELOC must be paid off before closing the sale of your existing home. 

Heck you may never use the HELOC. But it does give you flexibility for emergencies or real estate opportunities. Another option is to use the funds for an excellent investment property and make monthly payments from the cashflow. 

A home equity loan does not have an obligation to use. Generally you’ve got up to 10 years to withdraw funds and up to 20 years to repay. The rates currently range between 4-7%. And you can use a different lender than your existing mortgage. It’s also a better option than using a Bridge Loan, or second mortgage, for a new home purchase. Those typically have higher fees and restrictions due to more risk for the lender.

I suggest starting the process now to be ready for future opportunities in a hot Portland Oregon housing market. The lender requires an appraisal of your home to determine current market value. Then reviews your qualifications. This process can be timely in the current market and is rarely done in less than 60 days with local Portland lenders. National banks can be backed up to 6 months.

Some HELOC lenders may include a clause restricting you from selling your home within a specified period. They’d like you to use the credit line as a long term lending solution. Not short term hack to buying a home. Initiating sooner than later is smart planning. If you’re in a hurry to get funds, tell the lender you’re planning home improvements instead of looking to buy a new home. Every edge you can get in this market helps.

Josh helps sellers with innovative strategies to find their next Portland Metro home without the stress. If you’re considering selling your home Josh can help. Contact him today for advice on using HELOC for down payment or other real estate related questions.