Home equity line of credit for investment properties
Financing home equity investments has become a popular trend in recent years. With home prices at high levels and the economy continuing to perform well, homeowners across the country are making significant capital gains. Lenders have responded to this growing change and the home equity loan market has become competitive. This is good for homeowners, as loan requirements become more lenient and interest rates are lowered to attract new customers.
A home equity line of credit, or HELOC, is a type of home loan that allows homeowners to use equity as collateral. As with a credit card, owners can borrow up to a fixed amount as long as they do not exceed the credit limit. The term of the loan is generally determined at the time of approval and borrowers can withdraw from the line of credit for the life of the loan.
A HELOC only requires you to pay interest on the amount you borrow and is often eligible for tax deductions. Interest is generally set at an adjustable rate to minimize risk to lenders.
How is home equity determined?
Home equity is measured by subtracting your mortgage balance from your home’s equity. As you pay off your home mortgage and your property values increase, your home equity will increase. If the property’s value has depreciated, the equity may also decline.
For example, if you bought a home for $ 225,000 and paid $ 75,000 on the mortgage, then your remaining balance is $ 150,000. If your property is estimated at $ 250,000 at the time of the loan, then the maximum available value of your home will be calculated at $ 100,000.
You can build equity in your home by making home improvements or renovations. If you refinance your mortgage for a 15-year loan over a 30-year period, you’ll also see that the principal builds up faster as you pay off the original mortgage in almost half the time.
Other factors that influence property values include the location of your home, local economic growth, and the performance of the national economy. All of these can bring big gains in home equity and are best understood by looking at the appreciation in home prices in recent years.
HELOC vs Home Equity Loan
The main difference between a home equity line of credit and a home equity loan is how the line of credit is accessed. A home equity loan, or second mortgage, is provided as a lump sum, while a HELOC is an open source of money. Home equity loans are established with a fixed interest rate and for a predetermined period of time. HELOC credit can be accessed at any time as long as the limit amount is not exceeded.
Applying for a HELOC has upfront fees, such as application fees, point charges, and appraisal fees. Additionally, there may be additional closing costs and transaction fees. Be sure to ask your lender if any or all apply.
Using equity to invest
Using home equity for investment property has its risks. If you are financially stable and will not depend on investment returns to cover your first mortgage, then you are in a good position to take out a HELOC. Many homeowners and investors have used this strategy to recover from foreclosures and auctions; And the market is strong enough that you can get additional income from real estate investment. However, if you cannot meet your home equity loan requirements, you risk losing your home and this can be a relentless loss. Before applying, consider advising your financial advisor to decide if a home equity line of credit is right for your situation.