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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 get started investing in real estate by borrowing against a valuable asset they already own: their home.
So, before you continue, if you would like 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)
HELOCs allow you to take out a loan against the equity you’ve built up in your home. A home equity line of credit (HELOC), unlike a home equity loan, allows homeowners to use their most valuable asset – their home – to consolidate debt, remodel or repair their home, or even put down a deposit on an investment property.
To obtain a HELOC, you must have a hard asset, such as a home, with sufficient equity to borrow against. Instead of a dollar amount, the lender will give you a maximum “draw,” which equals the amount of equity in your house.
HELOCs have a specific period during which the credit can be used, as well as a set period during which the borrowed funds must be repaid. Homeowners paying down home equity line of credit loans often have five to ten years to pay only interest and another ten to fifteen years to pay off the principal.
2nd Mortgage vs. HELOC: What’s the Difference?
Take note of the distinctions between 2nd mortgages and HELOCs. 2nd Mortgages are similar to standard mortgages but have a higher rate then a 1st mortgage. 2nd mortgages feature a fixed interest rate and are a one-time loan that must be reimbursed according to a set timeline.
On the other hand, HELOCs are revolving lines of credit with variable interest rates that you can access at any time. Because interest rates fluctuate so much over time, the amount you owe on your home equity line of credit payments each month could alter considerably.
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 having to dip into their financial reserves.
The Advantages of Using a Home Equity Line of Credit
By borrowing against their home equity to purchase their first investment property, first-time investors can take advantage of several advantages. 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, if you complete your payments on time and schedule, your overall credit score will rise.
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.
Discover How To Apply For An 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 provide you with the freedom to use the equity you’ve built up in your house as you want.
How to Receive a Home Equity Line of Credit
When considering a home equity line of credit, the first thing to consider is whether you qualify for one and whether it is the correct investment option for you. You will most likely qualify for a HELOC if you are a homeowner with proven equity in your home. The following are some of the criteria that influence qualification:
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 are having in your home will affect whether or not you qualify for a home equity line of credit, as well as 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 in case 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 line of credits 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.