Numbers behind the Nails: Our Experience with a Home Equity Line of Credit

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I’ve been rather quiet around here because I’ve been pouring my energy into something exciting! We’re set to close on another house this Friday! We had it on our 2017 personal goals to work on getting a rental property and we thought initially we wanted to be in the commercial side of rentals but with the direction Greenville is going in we started entertaining small residential properties in the downtown area.  Greenville is building a new park currently called “City Park” starting in 2018 that will be more than twice the size of Falls Park and in the opposite direction along the Swamp Rabbit Trail.  With the Arts District also up and coming we lucked into a property right in between the two.  It’s 750sq feet of solid work so I shouldn’t be short on blog content for the foreseeable future!

Rendering of “City Park”

I’ll blog a little more about the house once we officially close! First order of business…..a new roof! 

I really wanted to blog about the “numbers behind these nails” because we’ve been recently educated first hand and wanted to be a resource for others interested in the same type of thing.  We are 30 years old with two kids and I work part time so it’s not like we have piles of cash sitting around.  For our DIY friends, this could be really beneficial to you! Let me start from the beginning….

We decided we thought we could try to finance a really small property or go in with other people on it. So, we started by emailing our realtor and telling her what we were interested in, what our budget was (the amount we thought we could finance), and a general location.  She added us to an email list where we got an email anytime something hit the market within our criteria.  I stalked Zillow for months and sifted emails for weeks ya’ll. I’d open and immediately look at location before even looking at the house….if it wasn’t where I wanted I didn’t even bother looking at anything else.

During this time our (uneducated in this arena) selves learned two things.  (Seriously don’t laugh at us if you already knew these things…..scroll along….this is for those of us still learning)

  1. The bank will not lend on land…no matter how good you think your idea for it is 😊
  2. If you are buying your second home you must have at least 15% cash to put down. It’s not like you can get 100% financing (and pay PMI like you could a first home)
  3. The rental property market in Greenville likes cash.

We quickly realized we weren’t going to be able to play in this game without cash so we started looking into home equity lines of credit.  When I say can’t play I mean investors here snatch up everything low priced they think they could flip within 24 hours of it hitting the market (or before it ever hits the market at all)

This is something we had thought about getting but never took seriously.   We poked around on google and saw we could apply with Bank of America (our bank) online so we went for it.  We filled out the application not knowing what to expect.

HOLD THE PHONE.  These interest rates are like 8%. Say WHAT???? No thanks.

Lesson learned during this phase:

  1. If you know someone at a small bank, go to them and explain what you are doing.
  2. If you don’t know someone we can recommend someone to you 😊
  3. The rate at the small bank is going to depend on your credit but ours is 2% for the first year and prime (4.25%) thereafter. We went with BNC.

The bank does a “drive by” (computer generated) appraisal on your house which could come back good for you or could come back awful….ours came back really low and was scary for a couple days.  It came back at 10K over what we paid for our house which isn’t fun when you bought a fixer upper (for a steal) and have done a bunch of work.   So, we ordered a full appraisal where someone came out and actually came into our house and did a full report.

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That appraisal came back much higher and closer to the fair value of our house so we were quite relieved.

Now, another learning point:   The bank has a Loan to Value Ratio they calculate based on credit and/or how much you are borrowing.  We were told if you’re borrowing under 100,000 they will lend at an 89% LTV ratio.   This is there to protect the bank in case you default and they can’t sell your home for what they thought they could (recession probs)

Here is how the formula works:

Let’s put some fake numbers in here as an example:

 

*Bet you won’t find another home blog that has a spreadsheet copied and pasted in…. #accountantlife

Friends! If you have an old house you have done work to it is WORTH your while to look into this for yourself.  Your fixer upper can bank roll your next investment project.  We were over here sitting in this house we had done a bunch of work to, but didn’t want to sell, and didn’t realize we could put our equity to work for us already.

When you get a home equity line of credit you have a closing at a lawyers office with the bank just like you would on a mortgage.  In SC there is a 3 day period for you to collect your head and think through what you’re doing so you can’t spend any money for 3 days.  This is important if you’re using your money to purchase another house.  You can expect your closing costs to be about 1% of what you borrow….maybe less if you don’t have to order a full appraisal.

Now a line of credit means it is there but you aren’t borrowing it unless you decide to.  There are home equity loans where the bank gives you all the cash up front.  A line seemed better for us.  You do you.

Anyways, you receive a checkbook from the bank and you can spend the money on whatever you need to spend the money on.  In our case, our share of the house we’re partnering on and some renovation costs to get it going.  But other’s use them for things like college (the interest rates are cheaper than actual student loans).  As accountants though…we have to say, be mindful to use it on things that will return on investment 😊

I really just wanted to share our experience with this because we were clueless about the process of this lending vehicle! I really thought we would have to sell this house to reap the benefits of our work.  Tell me fellow DIY friends, did you already know the ins and outs of home equity lines?  How was your experience?

Questions for us?  Drop them in the comments and we’ll do our best to answer!

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