Unaswered questions about HELOC
June 18, 2024
by a searcher in USA
I am trying to definitely understand the process and benefits of taking out a HELOC prior to seeking SBA funding for an acquisition. I have read nearly all the posts here, but have not seen answers related to these two aspects:
1- I understand it can be used to decrease the % equity available related to the personal guarantee. However, doesn't this also negatively affect the bank's view of your post-close liquidity?
2 - Also, is the equity considered "unavailable" even if you don't draw down the HELOC?
3 - Multiple folks consider using a HELOC to fund working capital, but are the terms that different than a LOC offered by the bank? If so, in which way?
Thank you!
from The University of Michigan in Snohomish, WA, USA
Since I recently went through the process of setting up a HELOC, here are a few of my takeaways:
The HELOC market right now is not nearly as friendly to consumers as it was when I set up a HELOC back in 2017 on my previous house. Rates are higher (obviously) but there is also less of an appetite to lend and there is now a wide spectrum out there when it comes to fees & LTV (loan to value ratios) and other terms so you have to do a little extra digging to find the right fit.
I set my HELOC up with PenFed Credit Union at 85% LTV and an interest rate of prime + .75%; they were straightforward to work with other than their login process being a little clunky (separate accounts for application vs managing your account after application). Penfed doesn't charge closing costs unlike some others that wanted to charge points & other closing costs. Took me just over 2 weeks start to finish to set it up.
Credit Unions seem to usually have the best rates. Some banks & credit unions offer higher LTVs all the way up to 100% but the interest rates start going up a few more percent on the HELOC to compensate them for risk when you are doing a high LTV. For example: Better.com quoted an 11.25% (prime + 2.75%) rate along with $3800 in points fees for a $250K HELOC! No thanks.
Below are a few options I considered or found about from others after I had already set up my HELOC:
DCU - high maximums and they'll go up to 90% LTV, rates are prime - .50%.
Signature Federal Credit Union - seems to have a decent reputation and does a lot of HELOCs - they offer up to 100% LTV with a max of $250K. Processing time is slower around 4-6 weeks. Interest rates are ~###-###-#### % depending on LTV.
First Citizens - promo rate is 5.99% for the first 12 months if doing 80% LTV, and looks like the rate goes up to prime after that. They can go up to a max of 89.9% LTV.
If you are ok with 80% LTV, ThirdFederal is a good option - their rates are probably the lowest at prime -1.01% (7.49% right now).
The lenders I mentioned above are mostly national lenders and should generally be an option in most or all states. There are also some lenders that are good but only work in some states. Truist Bank (who I have my primary mortgage with) offers 89% LTV and good rates at prime + .35% but doesn't do HELOCs in WA state so I couldn't use them.
Hope this helps save someone some research time!
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
2) Yes, the equity is considered unavailable whether you have a balance on the home equity loan or not.
3) The biggest benefit of using a home equity loan to fund future working capital needs is the interest rate on a home equity loan is likely going to be better than the Bank rate on a line of credit. In addition, you do not need to leverage the business further, which may help to get a deal done. However, you are now taking additional business risk right to your personal finances in that if the business ever fails, you now have that additional exposure directly against your home.
I hope this helps to clarify. You can reach me with questions here or directly at redacted