Pros Of Using A Home Equity Loan To Buy An Investment Property
One advantage of using a home equity loan to buy an investment property is that it may be easier to qualify for than other options. Mortgages for investment properties tend to have more stringent requirements than home equity loans, and theyre often more costly.
There are other upsides to using a home equity loan: The benefit of using a home equity loan is that the interest rate may be lower, says Spigelman.
Other benefits include:
- You get a large amount of cash, which you can use as a down payment or to purchase a property in full.
- Interest rates are fixed, meaning you enjoy a consistent monthly payment for the entire loan term.
- There are many repayment terms to choose from, ranging from five to 30 years.
- You dont have to tap into your savings, emergency fund, or retirement accounts to pay for your second home purchase.
- It may be easier to qualify for than a traditional loan, and interest rates may be lower.
Can You Use Heloc To Make Down Payment For An Investment Property
Savvy real estate investors can use HELOC to make a down payment for an investment property or a rental property. Using HELOC on an investment property is a fantastic way to cover down payment fees.
So you can either take out HELOC from primary residences or another rental property to buy an investment real estate property if you don’t have enough cash reserves. Compared to other loan options available in real estate investing, rental property HELOCs are the intelligent way to grow your investment portfolio.
There are also tax advantages when you take a HELOC on a rental property because the interest rate is tax-deductible. However, because banks hold a higher credit standard for rental property HELOC and investment properties generally, homeowners with multiple properties are more likely to accept default payment on investment property than their primary residence.
Investing In Home Improvements
Whether youre looking to improve your home to get it ready to sell or just want to give your living space an update, using your home equity to invest in home improvements is a popular decision. Plus, certain improvements can even increase your homes value above and beyond their sticker price, helping you build even more equity in your property.
There can be a downside to this, though. Its important that homeowners research the types of home improvement projects that offer the best returns in their area. Some may not be worth the expense, especially if youre only making the improvements to boost your homes resale value. This is especially true for very personalized remodeling projects.
Lastly, consider when to invest in home improvements based on how long you plan to stay in the house. If its your forever home, this doesnt matter so much. If youre planning to sell, though, you may want to enjoy your efforts before selling the property, especially if your improvements dont retain as high of a resale value.
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Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our loans reporters and editors focus on the points consumers care about most the different types of lending options, the best rates, the best lenders, how to pay off debt and more so you can feel confident when investing your money.
Can I Use A Home Equity Loan To Invest In A Real Estate Investment Trust
You can use your home equity loans proceeds on anything you like, including investing in a real estate investment trust . Investing in an REIT can mitigate some of the risks of individual real estate investing, but they have come under recent fire for buying up properties in areas and contributing to the housing crisis. Additionally, eroding your homes equity to invest carries the risk of foreclosure if you cant afford to pay back your home equity loan.
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Second Homes And Investment Properties
If you decide to take out another mortgage to pay for a second home, lenders will look carefully at your debt-to-income ratio to determine whether you can manage two mortgage payments. A low DTI also works to your advantage because it helps you qualify for a lower interest rate on the loan. For second homes, lenders prefer a DTI below 36%.
If your DTI is high, you have several options. You can pay off more debt before buying another home, buy a less expensive home or increase the amount of your down payment. Some lenders want a down payment of 10-20% on second homes, potentially more if its purely an investment property.
When shopping for a second home loan, it makes sense to first talk with the lender who holds the mortgage on your primary residence. This is because youre already doing business together and have an established financial relationship. However, you may find a better deal with another lender.
While many second-home buyers consider their purchase an investment, whether its considered an investment for tax and loan purposes is another story. Think about why you want to purchase the home. Is it exclusively for personal use, or do you expect to rent it out part of the year? Whether its considered a second home or investment property could make a big difference in your tax situation.
Lending Criteria And Taking The Next Step
Lending criteria are much more stringent when it comes to investment properties. For example, many lenders will require that you have owned the rental property for at least a year. Some even require that the rental property has already been rented out and that you have enough rental property insurance. They may also require that you have a history of successful real estate investment, which reduces the risk in their minds.
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How To Find A Lender For An Investment Property Heloc
The best way to find a lender for a HELOC on investment property assets is to leverage your existing network. This is because not all lenders will grant HELOCs for investment properties, making them somewhat tricky to find. Investors should ask mentors and other connections to learn more about HELOC providers. Be sure to consult your most recent lender, whether that be a traditional bank or otherwise, to learn if they know of any options. There will likely be a few potential lenders to choose from, allowing investors to choose from the best approval requirements and interest rates.
Aside from word-of-mouth referrals, investors can also research lenders online or contact previous connections to see what options are available. While it is easier to find HELOC providers for a primary residence, lenders are willing to do the same for investment properties. Often, smaller banks or credit unions are more likely to provide HELOC loans. Search online and be sure to confirm that they finance investment properties.
Home Equity Loan Rates And Other Calculations
Home equity loans are distributed in a lump sum, and the interest rate is fixed. According to Bankrate.com, todays average home equity loan rate is 7.94 percent.
But what is home equity, exactly? And how much can you borrow, anyway?
Lets talk about the concepts of market value and loan to value . For simplicitys sake, Im leaving closing costs out of these equations.
in simple terms is what the home is worth. Its best to hire an appraiser to determine the true market value, but alternatively, you can save around $600 and get good feel for what it likely is based on a comparative market analysis .
Say you own a home with a market value of $100,000. If you own it outright, you have $100,000 of equity in it. But if you have a mortgage of $45,000, you have $55,000 of equity in it.
Some lenders will lend you up to 90 percent of your equity in your primary residence. This equates to a 90 percent LTV.
So, in a $100,000 house with a $45,000 mortgage, that means you can borrow:
$100,000 X 0.9 $45,000 = $45,000
This is not the case for a rental property. Most lenders offer 75 to 80 percent LTV on rental properties.
In a $100,000 rental house, that means you can borrow:
$100,000 X 0.75 $45,000 = $30,000
Of course, these loan opportunities come with some pretty stringent conditions. For instance, it can be difficult to secure a home equity loan if you have bad credit, dont meet certain debt-to-income ratio requirements, and so on.
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Using A Home Equity Loan To Invest In Real Estate
Home equity loan proceeds can be used on anything you choose, including investing in real estate. To use a home equity loan to invest in real estate, youll need to have some equity in your existing property, decent credit, and proof of income sufficient to pay back the loan.
Once your home equity loan has closed and you have picked out an investment property, you can use the proceeds from your home equity loan in any way you choose on your investment property, or anything else. The cash is yours to use as you wish after the loan closes.
However, just because you can use your home equity loan to invest in real estate doesnt mean you should.
What Is A Heloc
Also known as a Home Equity Line of Credit, a HELOC is a second mortgage on a rental property that works similar to the way a rotating line of credit on a credit card does. The lender sets the credit line dollar amount using the rental property as security. The borrower can draw on the line of credit as needed, repay the balance over time, then use the credit line again.
In most cases a HELOC has a draw period such as 5 or 10 years during which the borrower can draw on the credit line and make monthly interest-only payments.
When the draw period expires, the borrower must make monthly payments of principal and interest until the outstanding balance is repaid in full. The repayment period of a HELOC varies from lender to lender, but may last up to 20 years.
Lenders normally set few restrictions on how the funds from a HELOC can be used. Some examples of how real estate investors use a HELOC on a rental property include:
- Updating and improving an existing rental property to obtain a higher monthly rent
- Making capital repairs such as replacing the HVAC or installing new flooring
- Forcing equity appreciation and increasing property value by converting an attic or basement into additional rentable square footage
- Paying off the outstanding mortgage on another rental property
- Using funds from a HELOC as the down payment for an additional rental property
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How To Draw Equity Out Of Your Home
Thinking of renovating one of your properties, or perhaps investing in a new one to grow your portfolio? Considering the usable equity accumulated in your original property is a savvy way to help finance this venture.
A home equity loan is an excellent alternative to a personal loan, or even a line of credit because the interest rates are lowerâand you can use the money for just about anything you wish.
Our specialists at The Mortgage Agency have broken down everything you need to know on how to draw equity out of your home.
Can You Take Out A Home Equity Loan Or Heloc From An Investment Property
If you already have an investment or rental property, you may also be able to take out a HELOC or home equity loan against it and use those funds to purchase another investment, make repairs on the property, or cover other business expenses you might be facing.
With these loans, you will typically need to meet stricter requirements than you would on your primary residence, as it poses more risk for the lender.
The advantage here is that you can use the funds for anything. It can be a good way to leverage your investments and make them truly work for you.
On the downside, youll need to meet stricter standards to qualify, there are closing costs, and you put your investment property at risk of foreclosure. It might also be harder to find a lender since fewer companies offer this kind of financing.
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Get Money From Your Home Equity Line Of Credit
Your lender may give you a card to access the money in your home equity line of credit. You can use this access card to make purchases, get cash from ATMs and do online banking. You may also be given cheques.
These access cards dont work like a credit card. Interest is calculated daily on your home equity line of credit withdrawals and purchases.
Your lender may issue you a credit card as a sub-account of your home equity line of credit combined with a mortgage. These credit cards may have a higher interest rate than your home equity line of credit but a lower interest rate than most credit cards.
Ask your lender for more details about how you can access your home equity line of credit.
What Is An Investment Property Loan
Investment property loans are for a single-family, townhome, condo, or multi-unit property that has been purchased with the intention of earning a return on the investment, either through rental income, future resale or both.
For those interested in buying an investment property, Pennymac offers loans to fit unique investor needs. As an option, you may be able to use your current home equity to finance buying an additional property. Give us a call to see what your options are or apply online.
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The Value Of Your Home Can Decline
Keep in mind that theres no guarantee that your home value will increase substantially over time. Your home may even lose value in times of economic downturn or suffer damage from fire or extreme weather.
If you take out a home equity loan or HELOC and the value of your home declines, you could end up owing more between the loan and your mortgage than your home is worth. This situation is sometimes referred to as being underwater on your mortgage.
Say, for example, that you owe $300,000 on your mortgage but the home prices in your area tanked, and now the market value of your home is just $200,000. Your mortgage would be $100,000 more than the value of your home. If your mortgage is underwater, getting approved for debt refinancing or a new loan with more favorable conditions is much harder.
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Are There Advantages To Taking A Heloc On Investment Property
Some advantages are worth considering before you write off HELOCs as too expensive or difficult to obtain. As an investor, you want to ensure that your assets are productive. Money tied up in a propertys equity in a rental property is unproductive.
And HELOCs only cost money if you spend the funds. You can always keep the HELOC on hand as a source of cash flow if an investment opportunity arises.
And, finally, the draw period for HELOCs usually lasts up to 10 years, so theres no immediate rush to spend the cash. And you dont have to begin repaying the line of credit until the draw period ends.
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Common Uses Of A Heloc
Some of the most popular ways homeowners use HELOC funds include:
- Home improvements – Using your home equity to pay for home improvement projects that increase the value of your home can be a smart move.
- Medical expenses – A HELOC may be a good option if you have large or ongoing medical expenses and want to take advantage of lower interest rates.
- Large purchases – Because HELOCs have longer repayment periods than many loans, they may be an attractive choice for making large purchases.
- Tuition or education costs – HELOCs often have lower interest rates than student loans, though some lenders may place restrictions on how you can use the funds.
- Debt consolidation – A HELOC may be a good choice for consolidating credit card debt. However, be careful not to rack up even more debt during the HELOC’s draw period.
Third Federal Savings And Loan: Best Home Equity Line Of Credit With A Long Repayment Term
Overview: Third Federal offers home equity loans and HELOCs featuring long repayment terms, potentially low interest rates and few fees.
Why Third Federal Savings and Loan is the best home equity line of credit with a long repayment term: Third Federal’s HELOC offers one of the longest repayment terms of its competitors, which make payments more affordable for borrowers.
Perks: If you find a lower interest rate with another lender, you could qualify for an interest-rate match or a $1,000 check from Third Federal. Additionally, Third Federal has no closing costs or minimum draw requirements.
What to watch out for: Third Federal charges a $65 annual fee, which is waived for the first year. Additionally, there is a minimum monthly payment of $100.
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