A home equity line of credit (HELOC) can create a path to fund an investment property, among many other needs. But why should you choose to get a HELOC over other types of loans? Read on to learn how a HELOC works, along with its advantages and additional uses.
What is a HELOC?
A HELOC is a type of revolving credit that lets you borrow against the equity you’ve built in your home. Your home would then be used as collateral. Borrowers typically use HELOCs when they have bigger purchases to make or to consolidate debt.
There are two phases to a HELOC:
Draw Period: During this set period, you can withdraw money from your line of credit as you need it and only repay interest. This can be especially beneficial when buying an investment property since you can take this time and funds to make improvements and get it ready to produce income.
Repayment Period: After the draw period, you’d pay the loan in full with interest. Ideally during this time, your investment property would be producing income, which can help with the payments.
Why Might You Want a HELOC?
There are a handful of advantages to using a HELOC to buy an investment property over other types of loans or financing options.
Higher Loan Limit
With a HELOC, you can borrow up to 100 percent of your home equity. This is especially advantageous when you’re making a large purchase (like an investment property). Keep in mind that the maximum amount of your line of credit depends on how much equity you’ve built in your home.
Lower Interest Rates
HELOCs generally have lower interest rates than other types of loans, such as personal loans or credit cards. This can help you save significantly in interest when it comes time to pay back the HELOC.
Repay Only What You Borrowed
Since a HELOC is a line of credit from which you withdraw funds as needed, you’ll only have to repay what you borrowed. This way, you don’t have to pay interest on funds you didn’t use.
Before You Apply
Before sending in that application, take some time to determine whether a HELOC can work for your situation. Here are some factors to consider.
Home Equity
If you’ve made enough payments on your current mortgage and know you have enough home equity built up to buy another property, it may potentially be a sound investment move to supplement your current income. However, if you haven’t had your current mortgage for very long, you may want to wait before using a HELOC to fund an investment property.
The Property
A lot of factors go into the potential income of a property: location, condition, market conditions, etc. For example, if you buy a run-down building that will need significant repairs, it may not be worth it right now. On the other hand, buying property in a popular neighborhood can be beneficial, albeit likely pricier. Determine what kind of property you’re realistically able to support.
Real Estate Portfolio
Diversifying into different markets can help reduce potential losses. Investing in various types of real estate or real estate in different local markets could be a fortifying supplement to your existing investment portfolio.
How Else Can You Use a HELOC?
A HELOC can be used for a variety of purposes.
Debt Consolidation
Credit cards typically have higher interest rates than HELOCs. When you use a HELOC to consolidate this high-interest debt, you can potentially save a significant amount of money in interest.
Home Improvement
You can finally start on your desired home improvement projects by funding them with a HELOC. One of the biggest advantages of using a HELOC for this purpose is the possibility of unexpected costs throughout the renovation process. You’ll be able to draw money as needed instead of borrowing more money than you need.
How to Get Started on Your HELOC
Buying an investment property can be a complicated, expensive process. Fortunately, we offer unwavering support during every step of the loan process. Apply for a HELOC with The Federal Savings Bank today by getting in touch with one of our mortgage bankers.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.
