HELOC question

[brian.gerson]

If my house has a second mortgage, does that mean I can't get a HELOC?

I'm closing on a house soon, and my employer is loaning me part of the downpayment, which he will be securing with a second mortgage. I want to do the Smith Maneuver, which requires a HELOC, but perhaps I have to wait until I pay off my employer.

[i6s1]

If you were loaned a down payment, you probably have next to nothing for equity on your house. So I don't think that you have anything you can borrow against.

[brian.gerson]

Purchase price:$325k
employer loan:$40k
my equity:between $35k and $70k depending on what level I need to invest to get the HELOC (if this is possible at all)

[pitz]

Forget the Smith Manouevre. Its really only suitable for people who have more than half their houses paid off.

[jheath]

You need at least 20% equity to have a Heloc, and no bank will allow a 2d behind it or 2 mortgages plus a Heloc.
If you got a Heloc in 1st position, it would specifically stipulate that no secondary financing was allowed. So the lawyer that was registering the charges would essentially be committing fraud if he allowed your employer's second mortgage charge.
If you had a 1st mortgage, plus your employer's loan, the HELOC would have to go in 3rd position, and no bank or A lender would take a charge in 3rd position.
Pay off the employer's loan first, then get a HELOC later if that's what you want.

[brian.gerson]

Thanks for the information/advice, everyone. I will pay the employer back over the next year and then apply for a HELOC. I don't actually need the employer's money, but I can get it at prime and invest the money elsewhere.

pitz, I am curious as to why SM is not advisable unless you have 50% equity?

[EugW]

Thanks for the information/advice, everyone. I will pay the employer back over the next year and then apply for a HELOC. I don't actually need the employer's money, but I can get it at prime and invest the money elsewhere.

pitz, I am curious as to why SM is not advisable unless you have 50% equity?

Scenario 1.

$100000 home
$25000 equity
$75000 owed to the bank

You borrow $25000 and invest it in the stock market.

Then your house drops in value by 20%.
Then the stock market drops in value by 20%.

House now worth $80000.
Stocks now worth $20000.

You now owe $75000 to the bank for your home that is only worth $80000, plus $25000 for the HELOC, for stocks that only are worth $20000.

You sell all your stocks and pay that $20000 back into the HELOC. That means you still owe $5000 on your HELOC, and still another $75000 for the remaining mortgage.

ie. You now owe $80000 on a house that's worth $80000.

Then your mortgage term ends, and you try to get a new mortgage. Uh oh...

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Scenario 2.

$100000 home
$50000 equity
$50000 owed to the bank

You borrow $50000 and invest it in the stock market.

Then your house drops in value by 20%.
Then the stock market drops in value by 20%.

House now worth $80000.
Stocks now worth $40000.

You now owe $50000 to the bank for your home that is only worth $80000, plus $50000 for the HELOC, for stocks that only are worth $40000.

You sell all your stocks and pay that $40000 back into the HELOC. That means you still owe $10000 on your HELOC, and still another $50000 for the remaining mortgage.

ie. You now owe $60000 on a house that's worth $80000.

Then your mortgage term ends, and you try to get a new mortgage. No problem.

[Anonymouse]

I think the advice should be that you "can survive a worst case scenario," not that you have an arbitrary amount of equity in your house. I am in a similar position as BG, but my mortgage is 1.5 years' income, and I have enough savings to weather any conceivable storm. I simply don't think that houses are a good investment, and choose to put my money elsewhere.