What is a HELOC?
Did you know that a home equity line of credit (HELOC) is a type of finance that can help investors improve the value of a property or purchase a new real estate asset? It’s a revolving line of credit, which means your lender might offer you additional credit if you make consistent repayments over time, which is good news for investors! A HELOC typically has low interest rates, tax benefits, and flexible repayment options.
A HELOC works like this: A lender gives you a line of credit secured by a property you own. You can use that finance to expand your real estate investment portfolio by renovating a property or purchasing a new home so you can rent it out to tenants. Simple, right? You make monthly repayments on your HELOC and pay interest on the line of credit just like you would with another type of loan. The neat thing about this type of finance is that it comes with a lower interest rate than other credit, and you may be able to deduct that interest from your federal income taxes.
To be eligible for HELOC, lenders require that you have equity in your property. That’s because you need to secure the line of credit against your home. Lenders typically give you a line of credit that’s 80% of the value of your home, minus any amount you have left on your mortgage. If your home is worth $300,000, say, but you have a $100,000 mortgage, that means you have $200,000 in equity. You could borrow 80% of that amount, which equals $160,000. Your lender then typically requires you to make repayments on that line of credit for ten years—known as the “draw period.” However, lenders often offer additional credit after you start repaying your HELOC, so you could have access to further funds for years and years to come.
HELOC case study
An investor in Austin wants to renovate one of the properties in her portfolio to increase its value when she sells it. The property is worth $500,000, but she only has $50,000 left on her mortgage. That means she has $450,000 in equity. Her lender offers her a HELOC for $360,000 (80% of the property’s equity) with an interest rate of 4%.
The investor uses the funds to extend the property and add two new bedrooms and a bathroom. She makes monthly repayments on the line of credit. After five years of repayments, her lender offers to extend her line of credit.
The bottom line
A HELOC is a type of credit that lets investors improve the value of a home or invest in a new property. It can provide the funds you need to extend your investment portfolio. Lenders typically let you borrow 80% of the equity in your home, which is the value of your property minus the amount of any mortgage. A HELOC usually comes with a lower interest rate than other types of finance and can have tax advantages, making it an attractive option for investors.