We’ve talked about the Home Equity Line of Credit in past articles, but I wanted to zone in on a HELOC strategy that could help a buyer transitioning into their next primary residence. Ordinarily this buyer might need a contingency to sell their home in order to purchase their next home when they make an offer, but let’s suppose the buyer accessed their home equity by securing a line of credit and now has access to funds available for a down payment. This buyer, depending on their situation and if capable of qualifying for the loan on their new purchase as well as the HELOC payments, might now be able to make an offer without the contingency of the sale of their current residence. In a competitive market, this could be the difference between a seller accepting your offer vs another. The great thing about a HELOC is that unlike a cash out refinance you don’t immediately get the cash and start paying interest on it, but you have access to it when you need it.
Let’s say you’re considering moving but have not yet found the home you’re looking for. You might not want to put your house on the market since you haven’t found your ideal replacement home, especially in this market with such low inventory. Maybe you own a $2M home with about half in equity, and you decide to access $500,000 with a HELOC. This now becomes available for you to pull as a down payment on your replacement home, but in the meantime while you look for your next home, you’re not paying interest. It is simply available for you when you’re ready.
You find the perfect house, now you’re ready to make an offer. You can get your ducks in a row to sell your home, but you don’t necessarily need to rush because you don’t have a contingency to sell on your purchase. You get into contract on your next home, and close the purchase. Now you have three mortgages – your current residence, your HELOC, and your new home, but maybe you arrange for payments to start on your new home a few weeks down the road with enough prepaid closing costs. Hopefully you’ve made some progress on getting your house ready for the market, or maybe you listed it while in contract on your new home and are already generating interest. You get into contract with a buyer and after a few weeks you close. Your first mortgage on your previous residence is now paid off, as is your HELOC, and now you are left with your mortgage on your new home.
This takes a bit of planning, which is why I mention that even if you’re just browsing for new home online or attending some open houses for fun, looking into a HELOC might be valuable for you so that when the time comes you are ready with access to your equity.