A home equity line of credit is a great way to finance your real estate investments. Learn how to use a home equity line of credit to get the most out of your investment.
How to Use a Home Equity Line of Credit to Finance Your Real Estate Investments
A home equity line of credit, also known as a HELOC, is a loan that uses the equity in your home as collateral. The equity is the difference between the appraised value of your home and the amount you still owe on your mortgage.
A HELOC allows you to borrow against that equity, up to a certain limit, and then pay back the loan over time. HELOCs typically have lower interest rates than other types of loans, making them an attractive option for homeowners who need to finance major expenses.
One good use for a HELOC is financing real estate investments. Below, we’ll go over how to use a HELOC for this purpose and some things to keep in mind.
1. Determine How Much You Need to Borrow
This will give you an idea of what size HELOC you’ll need to apply for. Remember that you may not be able to borrow the full amount of equity you have in your home.
Lenders typically only allow you to borrow up to 85% of the equity in your home. So, if your home is valued at $200,000 and you still owe $100,000 on your mortgage, you have $100,000 in equity. 85% of that is $85,000, which is the maximum amount you could potentially borrow.
2. Apply for a HELOC
Once you know how much you need to borrow, you can begin the application process for a HELOC. You’ll typically need documentation about your income, employment, and debts. You’ll also need to have your home appraised so the lender can determine how much equity you have.
3. Use the HELOC to Finance Your Investment Property
Once you’re approved for a HELOC, you can use the loan to finance your investment property. This could involve using it for a down payment, closing costs, or renovations. Keep in mind that you’ll need to make payments on the loan, plus interest, and you’ll need to repay the loan in full within a certain period of time, typically 5-10 years.
4. Consider the Risks
There are some risks to be aware of when using a HELOC to finance an investment property. One is if the value of your investment property goes down, you could end up owing more on the loan than the property is worth.
Another risk is if you can’t make the payments on the loan, you could lose your home to foreclosure. This is why it’s important to be confident that you’ll be able to make the payments on the loan before taking out a HELOC.
5. Choose the Right Lender
Finally, be sure to choose the right lender when taking out a HELOC. You’ll want to compare interest rates and fees from different lenders to ensure you’re getting a good deal. Also, be sure to read the fine print of any loan agreement before signing it.
Other Things to Keep in Mind
There are a few other things to keep in mind when using a HELOC to finance an investment property. One is you’ll need to have good credit to qualify for a HELOC. Another is the interest on your loan may be tax deductible.
If you’re thinking of using a HELOC to finance an investment property, be sure to do your research and talk to a financial advisor to make sure it’s the right decision for you.
How can you withdraw funds from a home equity line of credit?
Most HELOCs typically have a draw period of 5 to 10 years. This is the time when you can borrow against the equity in your home. After the draw period ends, you’ll enter the repayment period, during which you’ll need to repay the loan in full.
You can usually make withdrawals from your HELOC by writing a check or using a debit card. Some lenders may also allow you to make withdrawals through an online banking portal.
Remember that you’ll need to make payments on your HELOC during the draw period, even if you’re not borrowing against it. If you don’t repay the loan in full during the repayment period, you could lose your home to foreclosure.
What are the interest rates on a home equity line of credit?
Interest rates on HELOCs can vary depending on the lender and the market conditions. However, HELOCs typically have variable interest rates (6.4%-21% for a 10-20 year draw period), which means they can go up or down over time.
If you’re considering a HELOC, be sure to compare interest rates from multiple lenders. Also, remember that your loan’s interest rate may be tax deductible.
What is the difference between a home equity loan and a home equity line of credit?
A home equity loan is a type of loan in which you borrow against the equity in your home. A HELOC is a type of loan that gives you a line of credit to use up to a certain limit.
With a home equity loan, you borrow a lump sum of money and make fixed payments over a set period of time. With a HELOC, you can borrow against the line of credit as needed, up to the limit.
Both loans typically have fixed or variable interest rates, and you may be able to deduct the interest on your loan from your taxes.
Can a home equity line of credit be utilized for anything else?
Yes, you can use a HELOC for other purposes besides financing an investment property. Some people use HELOCs to consolidate debt, pay for home improvements, or cover unexpected expenses.
However, keep in mind that if you use a HELOC for something other than buying or improving a home, you may be unable to deduct the interest on your loan from your taxes.
What is not a good use of a home equity loan?
There are a few things that are not good uses of home equity loans. One is using the loan to pay for everyday expenses, such as groceries or utility bills. Another is using the loan to finance a luxury purchase, such as a new car or a vacation.
Also, be sure to avoid taking out a home equity loan if you’re already struggling to make ends meet. Taking on more debt can only make your financial situation worse.
