A HELOC for an investment property is a good option if you need to borrow money based on your home equity.
Keep in mind, however, that HELOCs (or home equity lines credit) are often more difficult to get than HELOCs for primary property and less lenders will offer them.
We will discuss the pros and cons associated with obtaining a HELOC for an investment property, as well as other options to consider.
How can I obtain a HELOC for an investment property?
A HELOC (Housing Equity Line of Credit) is a revolving credit line that is secured by the borrower’s equity in a property. The borrower does not need to start making payments until they have started spending money, similar to a credit card.
You may be able pay for improvements to your investment property or to finance personal debts such as school expenses or medical bills by taking out a HELOC.
Remember that HELOCs on investment properties are more risky than HELOCs on primary homes. Your rate will likely be higher. There are fewer options if you’re looking for an HELOC to finance your investment property.
Boeing Employees Credit Union, for example, offers HELOCs to primary, secondary, and vacation homes, as well as investment properties and rental properties. However, each one has a different APR. The starting rate for a HELOC on a primary residence is the lowest, while the starting rate for an HELOC on an investment property is the highest.
How can I get a line credit to purchase an investment property?
HELOCs for investment and primary properties are similar. Documentation such as tax returns, pay slips and signed leases should be provided. An appraisal may be required by the lender.
After approval, you will receive a written agreement of terms and conditions that you agree to before you close your HELOC.
Meets strict requirements
Lenders will typically evaluate your HELOC application by looking at the equity in your home, your credit score, and your ability to repay the loan. An investment property has more requirements than a primary residence. Lenders often consider this to be a greater risk of default.
Search for Lenders
HELOCs are not available from all lenders. It is important to shop around. You should consider your current lender, mortgage broker, local banks and credit unions. You can also ask real estate investors for recommendations on lenders as part of your research.
Negotiate
You can contact lenders who have made offers if you are unable to find a winner from your research. If they don’t offer terms you like, you can ask for better bids or share other offers to see if you can beat them.
The pros and cons of obtaining a HELOC for an investment property
These types of HELOCs can have many benefits and drawbacks.
Pros
- You can only repay what you used, plus interest
- Repay the credit line and use it as often as you need during the draw period
- The interest rates on personal loans and credit cards are more likely to be lower than those on credit cards.
- If you use the money to renovate your home, you may be eligible for a partial refund of interest paid on taxes
Cons
- Finding lenders who offer these types HELOCs is more difficult.
- It is harder to qualify for these HELOCs than it is for a primary residence.
- HELOCs for primary properties tend to have higher interest rates than those on secondary properties.
- The interest rate can rise quickly because it is variable.
- If you default on your loan, you could lose your property to foreclosure
Alternatives for HELOCs
A HELOC on investment property is not the right choice for you. These are just a few of the options you should consider.
- Cash out refinance : This option allows you to refinance your mortgage up to the amount you owe and receive the difference in cash. You may pay a higher interest rate.
- Unsecured personal loans : These loans are more risky, so interest rates tends to be higher. This option might be a good choice if you don’t have much equity.
- Credit card If you have little equity, this is a good option. Credit card interest rates are high so shop around for the best rate.