Using a Home Equity Loan or HELOC to Borrow Against an Investment Property: Is it a Good Idea?
Are you considering taking out a home equity loan or line of credit (HELOC) to use against an Investment property? It can be a risky move, as it means you’ll be on the hook for three mortgages at once. But it can also be a great way to leverage your existing property in order to purchase another Investment property. In this article, we’ll explore the pros and cons of using a HELOC for an Investment property, so you can make an informed decision.
What is a HELOC?
A HELOC is a type of loan that uses the equity of your home as collateral. It allows you to borrow up to a certain amount of money, based on the value of your home. The loan is secured by your home, so if you default on payments, the lender can foreclose on your home to recoup their losses. HELOCs typically have lower interest rates than other types of loans and lines of credit, making them attractive for homeowners who wish to leverage their existing property.
How Does a HELOC Work for Investment Properties?
When it comes to using a HELOC for an Investment property, there are a few things to keep in mind. First, you’ll need to have a good credit score and a strong financial profile. You’ll also need to have enough equity in your primary residence to qualify for the loan. Lenders typically require a minimum of 20% equity in the home in order to qualify for a HELOC.
Quorum also offers a separate Investment Property HELOC specifically for Investment properties that has different rates and terms than its traditional HELOC. This option is designed specifically for Investment property owners who have a larger down payment and/or more equity in their primary residence and want to use it to purchase an Investment property.
Pros and Cons of Using a HELOC for Investment Properties
Using a HELOC for an Investment property has both advantages and disadvantages. On the plus side, it can be a great way to leverage your existing property in order to purchase another Investment property. Additionally, HELOCs typically have lower interest rates than other types of loans and lines of credit, making them attractive for homeowners who wish to leverage their existing property.
On the downside, taking out a HELOC on an Investment property can be risky. Sandra Flannigan, a real estate agent in Austin, Texas, says “having a HELOC right now to buy a long-term rental is definitely a mistake.” If you buy a $500,000 rental property, for example, and use a HELOC to finance it, you’ll be on the hook for three mortgages at once. Not only that, but you’ll also be at risk of losing your home if you can’t make the payments on the loan.
Another potential downside of using a HELOC for an Investment property is that it can be hard to get approved for a loan. Many lenders have strict requirements for HELOCs, including a minimum credit score and debt-to-income ratio. Additionally, you may also have to provide additional documentation, such as tax returns and bank statements, in order to get approved.
Finally, it’s important to keep in mind that a HELOC is a short-term loan. Most HELOCs have a 10-year draw period, meaning you can borrow money for up to 10 years. After that, you’ll need to start paying back the loan, which can be difficult if you’re relying on rental income to make the payments.
Conclusion
Using a home equity loan or HELOC to borrow against an Investment property can be a great way to leverage your existing property to purchase another Investment property. However, it’s important to weigh the pros and cons before deciding whether or not it’s the right move for you. Make sure you understand the risk as well as the potential rewards, so you can make an informed decision.
