A HELOC cuts this flip’s loan costs from $12,075 to $7,331

Flippers borrow short. A hard money lender prices that convenience in points you pay at closing plus monthly interest, and on a six month project the bill runs into five figures. A home equity line of credit, or HELOC, is usually cheaper money. It is also secured by the house you sleep in.

Can you use a HELOC to flip a house?

Yes, and the shape of a HELOC suits a flip. It is money you can draw, repay and draw again, so you can take the purchase price out in March and put it back from the sale in September. The CFPB describes it as an open-end line of credit that lets you borrow repeatedly against your home equity. Equity is your home’s value minus what you still owe on it.

Two limits decide whether this is available to you rather than theoretical. The line has a credit limit set by that equity, so a flip needing $195,000 of drawn credit needs a large line behind it. And the CFPB says you can generally spend up to the limit at any time during the borrowing period, which it also calls the draw period. That is what makes a line usable for a purchase that has to close in two weeks.

What does a HELOC cost against hard money on the same flip?

The difference sits in two line items: the points and the rate. Take the calculator’s default flip. A $150,000 purchase price, a $45,000 rehab budget, a $275,000 sale price, six months held, 2% buying closing costs, $900 a month of holding costs and 8% selling costs. Both columns borrow the same $172,500, which is 85% of the price plus the whole rehab budget. One is hard money at 10% with 2 points. The other is a HELOC at an assumed 8.5% with no points.

These are example figures, not a quote.

The points are most of the gap. Two points on $172,500 is $3,450, handed over at closing whether the flip goes well or badly. The rate adds another $1,294 over six months. Together the cost of the money falls from $12,075 to $7,331, and the $4,744 saved lands in the profit. The calculator shows that figure on its own row, called Cost of the money.

Notice what did not change. The sale price, the rehab budget and the selling costs are identical, and at $150,000 the purchase still sits above the 70% rule ceiling of $147,500 that the page reports. Cheaper borrowing does not fix a price.

Can a HELOC cover the whole purchase and rehab?

If the line is large enough, yes, and that is the real break from hard money. A hard money lender wants a down payment, 15% in this example. Your own line has no such rule, so you can draw the full $195,000 for the price and the rehab and put the down payment back in your pocket.

The third row earns $956 less than the second, because borrowing $22,500 more costs $956 more in interest across six months. It earns that smaller profit on $21,544 less of your own money, which is why the return on cash is more than double.

Treat that 247.6% carefully. Return on cash is a ratio, and any ratio flatters you as the cash in the deal shrinks. The $41,313 is the number that funds your next project.

What happens if the flip takes longer than six months?

Interest-only borrowing is cheap by the month, and the months are the risk. Hold this house nine months instead of six and the HELOC interest goes from $7,331 to $10,997, holding costs from $5,400 to $8,100, and profit from $42,269 to $35,903. At twelve months the profit is $29,538.

Hard money punishes the delay harder, because the rate is higher. The same twelve month hold leaves $23,500. So the gap between the two widens the longer you own the house, which is an argument for the cheaper line. It is not an argument for holding longer.

What can go wrong when your home is the security?

Three things, and the first one outranks the other two.

A HELOC is secured by your home. The CFPB puts it plainly: if you fall behind or cannot repay the loan on schedule, you could lose your home. A hard money lender who forecloses takes the flip. A HELOC lender who forecloses takes the house you live in. The same money, a different thing at stake, and that difference does not show up anywhere in the profit figure.

Second, the rate moves. The CFPB says HELOCs usually carry a variable rate, so payments may change from month to month. Raise this example’s 8.5% to 10.5% and the interest goes from $7,331 to $9,056, taking $1,725 off the profit. At 12.5% the interest is $10,781. A flip budget built on a rate that can move needs room for it to move.

Third, the draw period ends. The CFPB says that when it does you stop being able to borrow and enter the repayment period, where payments often rise and some lenders want the whole balance back as soon as repayment starts. A line with eighteen months left to draw is not a line to start a second flip on.

What should you check before you draw on the line?

Four things, in this order.

1. The limit against the need. Add the price, the rehab and the closing costs, then compare that with the credit still available. A line that cannot cover the draw means a second source of money and a different set of numbers.
2. What your agreement allows. Read it. Some lines restrict what the money may be used for, and a line opened for home improvement is not automatically a line for buying another house.
3. The exit. The sale repays the line, so price the house for the market you will sell into rather than the one you bought in. What it costs to flip a house lists the costs people leave out.
4. A rate you can survive. Run the flip two percentage points above today’s rate and check that the profit is still worth six months of work.

Put your own price, rehab budget and rate into the fix and flip calculator, then compare the Cost of the money row at both rates. How hard money loans work covers the points and interest side in detail, and the post on using a HELOC for a rental down payment runs the same line against a property you keep. New to this entirely? Start with how to flip a house for the first time.