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Once the draw period is over, you enter the repayment term to repay the balance. You can take out a HELOC or home equity loan against one property and use the funds for expenses. Unless you know the exact amount of cash you need, a HELOC might be a better option since you can withdraw money over an extended period of time.
Additionally, eroding your home’s equity to invest carries the risk of foreclosure if you can’t afford to pay back your home equity loan. Nobody can predict the future of the housing market with 100% accuracy, but it does appear that the wild growth rate of the last several years is starting to slow down as interest rates are rising quickly. Real estate investors may use a HELOC for a variety of uses, including updating or rehabbing an existing rental property, or using the funds for a down payment on another rental. The equity in your home is equal to its current appraised value minus the amount you owe in mortgage debt.
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Thanks largely, in part, to inflation, stagnant equity that isn’t making any interest or return on investment is essentially throwing money away. That said, using equity to buy an investment property with a sound game plan is almost always preferred to using equity for anything else. Since a HELOC will use the home as collateral, it’s important to make sure the loan is worthwhile. Do note that investors who choose to pursue the HELOC route may find it easier and more feasible to qualify for a line of credit on a primary residence.
This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has worked as a mortgage loan officer in the industry for over 20 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. "I want my rental properties to have equity and then I want to have access to that equity," Hall says.
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Loan terms such as interest rate, down payment, credit score, and loan length can be customized to fit the specific needs of the borrower. However, because portfolio loans can be easier to qualify for when an investor has multiple properties, there may also be higher fees and prepayment penalties. As a rule of thumb, loans for a residential rental property come with slightly higher interest rates and require larger down payments.
A HELOC is a revolving line of credit secured by your home’s available equity. HELOCs are available that will lend you up to 90 percent of the home’s appraised value minus mortgage debt. You can use your HELOC for any purpose, including the purchase of a rental property. LTV regulations are set by Freddie Mac and Fannie Mae, the government-sponsored enterprises created by Congress to provide mortgage market liquidity. Most lenders will follow the LTV leads of these mortgage industry giants, which as of 2019 permit an LTV of 75 percent for fixed-rate mortgages. If your rental property has been on the market, you must take it off, and any property that has been for sale for the prior six months qualifies for LTV of 70 percent for fixed-rate mortgages.
Interest Paid for a Home Equity Line of Credit on a Rental Property
For starters, you can write off any expenses you incur as a rental property owner. This means that if you take out a HELOC on your rental property’s mortgage, then any interest you pay on the HELOC can be written off as an expense. A primary loan refers to a traditional mortgage taken out to purchase a new property, while a HELOC on an investment property taps into existing equity. To effectively compare the two options, there are a few main differences to consider. LendingTree is compensated by companies on this site and this compensation may impact how and where offers appears on this site .
Don’t think a HELOC on an investment property is the right fit for you? If there isn’t an obvious winner, contact the lenders of your choice and ask them if they can make a more competitive offer. Tell them about the other lenders’ offers that they’re competing against. By negotiating this way, you could get an even better deal than you originally received.
While it is easier to find HELOC providers for a primary residence, lenders are willing to do the same for investment properties. Often, smaller banks or credit unions are more likely to provide HELOC loans. Search online and be sure to confirm that they finance investment properties. Investment property loans as generally having higher risk, and HELOCs on rental properties even more so, because a HELOC is a second mortgage.
Whether you get a home equity loan or HELOC, you will have two monthly payments, so make sure you have the money and organization to make that happen. Get a home equity loan if you prefer taking a large chunk of equity out of the second home at one time. You will pay the money back at a fixed interest rate over a set period, usually 20 or 30 years. As we explained earlier, first mortgage rates for new purchases and refinances are higher than they have been in several years. With rates recently exceeding 5%, you may not want to refinance your second home to pull out cash.
The similarities in their names alone are enough to confuse anyone unfamiliar with their uses. However, it is worth noting that their similarities are only “skin deep.” There are several differences between HELs, and HELOCs investors need to know about before they acquire one over the other. From an interest-rate perspective, a home equity loan may be safer because its interest rate is fixed, while the rate on a HELOC is variable. Borrowers with HELOCs have some protection in the form of caps on how quickly their interest rates can rise, although that can vary from lender to lender. However, using a home equity loan to buy another house is not without risks.
Besides securing the loan with a physical property, HELOCs tend to come with a little more uncertainty than many are willing to accept. With variable rates, the costs of borrowing could increase dramatically. As a result, unsuspecting borrowers could find themselves with more expensive debt than they intended. In fact, if you are going to use a HELOC on anything, you might as well put it into a sound investment. Unleveraged equity is, after all, dead money that could end up costing you in the long run.
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