HELOC On Investment Property: Complete Guide

Are you unable to make your first real estate transaction due to a lack of funds? It is a frustrating condition to be in, especially if you’ve discovered a fantastic price or a promising prospect. You might be searching for the options you have or what measures you can take to get past the initial major obstacle of not having enough money in advance.

A HELOC (home equity line of credit) might be the ideal solution. It is a terrific option for aspiring real estate investors to get the funds they need to start investing in real estate by borrowing against a valuable asset they already own: their home.

So, before you continue, if you want to learn more about HELOC pros and cons, interest rates and more, click the link below to book a free strategy call with our team at LendCity today.

How to Access a Home Equity Line of Credit (HELOC)

Utilizing the equity in your home via a Home Equity Line of Credit (HELOC) can unlock a wealth of possibilities. This strategic financial instrument allows you to leverage the worth of your property - your most prized asset, to consolidate debt, handle home renovations, or even provide the much-needed capital for an investment property. Unlike a traditional home equity loan, a HELOC offers flexibility in terms of how you use this monetary reservoir linked to your property's equity. 

The process of securing a HELOC demands that you own a tangible asset like a home and that this asset holds enough equity to borrow against. Instead of providing you with a lump sum, lenders will grant you access to a maximum "draw." This concept, essentially, stands equivalent to the amount of equity present in your home. 

4 Benefits Of Using A HELOC For An Investment Property

As a savvy real estate investor, you always seek methods to finance your acquisitions. But why choose a HELOC over other types of financing? Here's the scoop: 

Accessibility to Funds 

A HELOC operates similarly to a credit card. It's a revolving line of credit that allows you to draw funds when needed and repay them at your convenience. This makes a HELOC a flexible option for investors who require money at different stages of the property investment process. 

Lower Interest Rates 

A HELOC typically offers lower interest rates than other credit options like credit cards and personal loans since the loan is secured against your home. This means less interest spending and more towards achieving your investment goals. 

Tax Benefits 

Interest payments on a HELOC are often tax-deductible if the funds are used to buy, build, or substantially improve the home that secures the loan. These tax benefits can further decrease the cost of borrowing. 

Equity Utilization 

Unlike traditional loans, a HELOC allows you to leverage the equity you've built up in your primary residence. This way, you can use the value you've accrued in your home to facilitate your property investment endeavours. 

Consider the following table for an overview: 

"Smart real estate investors choose a HELOC because of its flexibility, lower interest rates, potential tax benefits, and the ability to utilize home equity. In a property investment scenario, these factors could translate into significant cost savings."

Leveraging a HELOC for your property investment could prove beneficial by providing flexible access to funds, lower borrowing costs, and potential tax benefits. However, like all financial decisions, it's crucial to evaluate your financial situation and consult a professional before diving in.

2nd Mortgage vs. HELOC: What’s the Difference?

Grasp the nuanced differences between second mortgages and Home Equity Line Of Credit (HELOC) loans. Though similar in essence to standard mortgages, second mortgages often carry a higher rate than the initial mortgage. Boasting a fixed interest rate, second mortgages are a one-time loan that obligates you to meet the repayment deadlines as per the predefined schedule. 

In contrast, consider HELOCs as flexible spending accounts with adjustable interest rates that you can tap into whenever needed. The varying nature of interest rates implies that the sum you owe on your HELOC payments can alter significantly from month to month, keeping in tandem with the ever-changing market trends.

Maintain the Model

Looking for a way to start investing in real estate with your existing assets? You might wish to think about the advantages of a home equity line of credit loan. You can utilize a HELOC to lend against the equity you’ve constructed in an investment rental property, for example, and acquire another rental asset.

HELOCs are a terrific way for experienced investors to swiftly expand their property portfolio without dipping into their financial reserves.

The Advantages of Using a Home Equity Line of Credit

First-time investors can take advantage of several advantages by borrowing against their home equity to purchase their first investment property. Check out a few reasons below why you should select a home equity line of credit as your first investment:

Improves credit

One of the main advantages of utilizing a home equity line of credit is that it appears on your credit report as a line of credit, just like a credit card. This means that if you utilize less than 30% of the cash available on your HELOC, your credit score will improve. Additionally, your overall credit score will rise if you complete your payments on time and schedule.

Enhances liquidity

You may wish to raise your cash on hand for various reasons, ranging from covering unexpected bills to purchasing an investment property entirely. Whatever your motivation, you can use a home equity line of credit to access financial assets that are now locked up as equity in your home.

HELOCs can be used for both the down payment and renovation costs of an investment property.

Disadvantages to using a HELOC for investment property purchases?

While a Home Equity Line of Credit (HELOC) can bring numerous benefits as a financing method, it is not without potential drawbacks that real estate investors should consider carefully. The complexities of this tool must be well understood to minimize these risks. 

Fluctuating Interest Rates

One significant drawback of using a HELOC is its inherently variable interest rates. Unlike fixed-rate loans, the interest rate of a HELOC typically adjusts depending on the financial market conditions. This aspect can potentially lead to unpredictable payment amounts, affecting the investment's stability.

End of Draw Period

A HELOC usually has a 'draw period', typically 5 to 10 years, during which you can borrow against your home's equity. However, once this period concludes, you won't be able to draw from the credit line, and you must begin paying back the borrowed sum. This may pressure your finances, mainly if your investment properties haven't yet achieved the projected income level.

Increased Debt

HELOCs contribute to an increased debt level. Over leveraging your investments increases your risk exposure, especially in a declining housing market.

Property Risks

In the event of non-payment or default, the lender could potentially take ownership of your property. As a HELOC utilizes your home as collateral, this can put your property at unprecedented risk.

Note: Despite the benefits, the risks involved in utilizing a HELOC for property investment should not be overlooked. Always keenly evaluate your financial situation, the housing market, and alternative financing options before proceeding with a HELOC strategy.

Risk-minimizing Tactics 

In order to mitigate these potential drawbacks, consider the following strategies: 

Financial Buffer

Always maintain a significant financial buffer. This will provide a safety net in case your investment doesn’t pan out as anticipated or if other unexpected expenses emerge.

Financial Planning

Effective financial planning is critical. Ensure you have a robust payback plan in place before utilizing a HELOC.

Risk Analysis

Analyze your risk tolerance. Your capacity to manage and absorb potential losses is critical in determining whether a HELOC represents a suitable investment strategy for you.

In conclusion, while a HELOC may appear as an attractive financing option, it comes with a set of risks that must be thoughtfully analyzed. Balancing the potential benefits against these potential drawbacks will ensure you deploy funds more securely and create a successful property investment portfolio.

What are the typical interest rates and terms for a HELOC used for investment property purchases?

If you're considering using a Home Equity Line of Credit (HELOC) to finance your investment property purchase, it's vital to understand the standard interest rates and terms involved. In this case, you'll likely encounter an interest rate that revolves around the Prime Rate, specifically, Prime Plus 0.5%. 

Note: The Prime Rate is a benchmark interest rate used by many banks to set rates on various types of loans, including a HELOC. It is, however, subject to fluctuation, making it imperative to keep an eye on the economic trends.

Interest Rates for HELOC - A Closer Look 

The cost of a HELOC is typically pegged to the Prime Rate plus a certain percentage, in this context, plus 0.5%. Here's an illustrative breakdown: 

Current Prime Rates as of Sept. 24th 2023

With these specifics, you need to maintain a keen eye on the Prime Rate trends. For instance, if the Prime Rate decreases, your HELOC rate might also decrease, bringing down the cost of borrowing. Conversely, if the Prime Rate increases, so do your expenses. 

Discover How To Apply For Investment Property Mortgages With This Step-By-Step Guide

Finances real estate purchases

Investing in real estate is one of the most strategic decisions you can make with your HELOC funds. Whether you are utilizing a home equity line of credit to cover a down payment or trying to buy an entire home completely, your HELOC can give you the freedom you need to make an investment that meets your objectives.

Provides funding for improvement projects

You’ve already bought your investment home, only to discover it needs a little more tender loving care than you thought. Even the most experienced investors are susceptible. A home equity line of credit (HELOC) could be just what you need to pay for property upgrades and have the asset ready to lease. HELOCs allow you to use the equity you’ve built up in your house as you want.

How to Qualify for a Home Equity Line of Credit

When contemplating using a home equity line of credit (HELOC) to fund your investment property purchases, the primary question to consider is whether you meet the qualifications for one and if it aligns with your investment strategies. As a homeowner with significant equity in your home, you are likely to be a strong candidate for a HELOC. Here are some factors that may determine your eligibility:

Credit score

Like any other credit line, your credit score is essential in determining whether you qualify for a home equity line of credit. HELOCs are less dangerous for lenders than unsecured lines of credit, such as credit cards, because you are lending against your home’s equity.

Debt-to-income ratio

Your debt-to-income ratio, which is factored into your credit score, could determine whether you qualify for a home equity line of credit or not. Banks are hesitant to provide you with another loan if you can’t afford to pay off what you currently owe. The majority of banks set a maximum debt-to-income ratio of roughly 40%.

Equity in your home

The equity amount you have in your home will affect whether or not you qualify for a home equity line of credit and the amount you can request. When the mortgage balance is less than the home’s worth, the house has equity. You won’t qualify if you’ve previously taken out a second mortgage or a home equity line of credit.

Do not be discouraged if you cannot qualify for a home equity line of credit. There are various financing options that prospective real estate investors might use to get into the market. You can always locate an investment opportunity that matches your needs if you are a motivated and intelligent business owner.

HELOC Financing Caveats

Not all lenders offer home equity lines of credit or are investor-friendly. We recommend you contact us at LendCity Mortgages for your investor financing needs. You can reach us using the link above or by calling 519-960-0360 or clicking the link below to book a free strategy call today.

Finance Corner, Using A HELOC To Finance Your First Investment Property