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Should You Use A Home Equity Line To Buy An Investment Property?

The lure of real estate investing has long since grabbed the attention of many people. The potential for wealth building, financial freedom, and retirement planning are all notable benefits of real estate investing. However, one of the trickiest parts of purchasing investment properties is financing. While there are multiple avenues & strategies available, often accumulating the cash needed for the initial investment is one of the biggest hurdles. One option available to alleviate this problem is a home equity line of credit, sometimes called a HELOC. Simply stated, a home equity line of credit is borrowing against the equity in your current home.

According to BankRate, “To figure out how much equity you have, subtract the amount you still owe on your mortgage from the value of your house. The difference is the amount of the equity, and part of that can be used as collateral for a loan.” Rather than sitting on the equity in your current home, a HELOC allows you to utilize that equity- in the form of purchasing an investment property, paying down outstanding credit, or financing home repairs. A HELOC can be a good alternative to traditional financing; however, it’s important to understand the full picture before cashing out the equity in your current home.

Should You Use A Home Equity Line To Buy An Investment Property?

HELOCS Are Not Traditional Home Loans

Unlike applying for a conventional or FHA loan, a HELOC is borrowing your current equity in your home.  You can borrow some or all of the equity in your home, and the specifics of the HELOC can vary bank-to-bank. According to Dawn Doebler, co-founder of Her Wealth & Senior Wealth Advisor at The Colony Group, “The interest rate is variable and you’re only charged interest on the amount outstanding…HELOCs can be a better choice than traditional loans for short-term projects or for unexpected cash needs.”

HELOCS Can Provide Access To Cash For Multiple Purposes

Again, unlike FHA, RD, or conventional loans, a HELOC can be used for more than acquiring real estate. Some people even utilize home equity to pay down substantial debt, finance a home remodel, pay for kids’ college education, or even finance long-term care. The flexibility that comes with a HELOC is attractive to many wanna-be investors, as they can avoid inspections & oversight that accompany construction type loans. However, it’s important to fully understand the bank’s fine print, requirements, payback schedule, and interest rate.

There Is More Than One Type

A HELOC is a home equity line of credit. However, there is another equity loan available: a home equity loan. According to Dawn Doebler, the primary difference is “A home equity loan is disbursed all at once in a lump sum at a fixed interest rate for a fixed amount of time, usually 10 years or longer. By contrast, a home equity line of credit is more like a credit card. The interest rate is variable, and you are only charged interest on the amount of the credit line that is outstanding.” Depending on your goals and timeline, one option may be better suited to your needs. It’s important to consult thoroughly with your lender to see which option is the best fit for you.

Read The Fine Print Before You Sign

As with any type of loan, there are risks. Knowing your financial capabilities and income forecast is crucial. In addition, knowing the specifics on the loan payback is also important. Most HELOCs are variable rates, and depending on the current rates, can either be good or bad. In addition, most home equity loans offer a certain time period in which the loan & interest must be paid. You also should understand that the with a HELOC or home equity loan, your home is being used as collateral in most cases to secure the loan.

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Jennifer is an accidental house flipper turned Realtor and real estate investor. She is the voice behind the blog, Bachelorette Pad Flip. Over five years, Jennifer paid off $70,000 in student loan debt through real estate investing. She's passionate about the power of real estate. She's also passionate about southern cooking, good architecture, and thrift store treasure hunting. She calls Northwest Arkansas home with her cat Smokey, but she has a deep love affair with South Florida.

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