Can a home equity line of credit be used to purchase a new home?

Asked by Terry Egan, New Brunswick, NJ Sat Jun 11, 2011

we have the down payment in cash. Does it make sense to use the home equity rath than get a mortgage?

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Robert Spinosa’s answer
Robert Spino…, Mortgage Broker Or Lender, Mill Valley, CA
Sun Jun 12, 2011

It can make good sense to do this, but it's harder to answer any more specifically without knowing all the details. Generally, you'd see more individuals avoid purchasing with a HELOC if they planned to keep the new property indefinitely. The obvious reason being that the line of credit will most likely have an adjustable rate with a cap at or near 18%.

But in today's real estate economy, if the HELOC is the only way to get financing, it may by default be the best way.

Rob Spinosa
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Shane Milne, Mortgage Broker Or Lender, South Jordan, UT
Sat Jun 11, 2011
It depends on what the terms are on your HELOC, how much you plan on borrowing, and how long you plan on repaying it. Right now my guess is your HELOC rate is pretty darn low, however in time it will increase (usually along with the general trend of mortgage interest rates) and so refinancing at that point could result in a higher fixed rate then than you would be able to secure now. However if you are only talking about a small amount of money, then a gradual increase in interest rate on the HELOC may not result in paying more interest than you would have otherwise if you took out a regular mortgage and converted it's closing costs to interest charges.

Further, some HELOC's do not permit them to be used to acquire new real estate, you would need to consult with your HELOC's terms & conditions, or contact it's lender, to confirm if there are any prohibited uses for the HELOC funds. The reason why some HELOC's do not permit it is because in the past they have been used for the down payment, and then the remaining is financed on a mortgage, and when taking the new mortgage payment into consideration they no longer would have qualified for the HELOC. Your situation is a bit difference - because you aren't looking to use the HELOC as a down payment & take out more debt, you are just looking to finance it all on the HELOC.

Bottom line is you'll need to check the terms of your HELOC to see if it allows you to purchase new real estate with it, as well as compare the closing costs & carrying costs of financing it on the HELOC vs. if you took out a traditional mortgage.
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