Home Equity Line of Credit for Investment Property
Home Equity Line of Credit (HELOC)
A home equity line of credit, or HELOC, can be a wonderful financing tool if used properly. Many lenders are boasting a HELOC for the use of consolidating debt, but a HELOC can be used much more effectively if used by investors. A Home Equity Line of Credit is a type of loan in which the lender agrees to provide a maximum amount of money over a given period of time. The built-up equity in the borrower’s home is then used as collateral for the HELOC. HELOC is a type of home equity loan process that has a revolving credit, much like a credit card. However, unlike a credit card and other loans (car loans and student loans), the interest doesn’t compound. A HELOC allows the borrower to establish a credit limit and borrow that money from the HELOC on demand. Essentially, if you need cash in a hurry for a short period of time, a HELOC is very useful.
HELOC vs Home Equity Loan
A HELOC differs from a home equity loan in several areas. First, a conventional home equity loan gives the borrower the full amount of the loan up front. As a result, the borrower is paying the principal and the interest for a set amount of time. A HELOC sets a line of credit in which a drawing period is established. This period could be anywhere from five to thirty years. Money can then be drawn from this loan at any time. The money drawn is then paid back once taken out plus interest. This allows the borrower to dictate to the lender when and how much money to draw. The only monthly requirement for a HELOC is a minimum payment on the interest rate, which is usually set at the prime rate. A home equity loan is usually taken out as a second mortgage, which is generally an amortized loan. With a HELOC, the style of the loan usually keeps the investor from reaching amortization.
HELOC for Investment Property
Because of the flexibility and control that a HELOC gives the borrower, it is often the type of loan chosen for property investment. In most cases, selecting a heloc vs home equity loan rewards the borrower with a lower interest rate than a home equity loan. If done correctly, a HELOC can be put into an investment that pays a higher interest rate. Since the government offers tax relief for interest accrued under a HELOC, the prime rate and the tax relief work in the investors favor. On a short-term property investment, the variable rate of the HELOC allows the investor to pay minimum payments at a low interest rate. If the turnover rate quick, a nice sum of may can be acquired. Borrowers now find a HELOC to be a useful tool in financial investment and enjoy the benefits of dictating cash flow. |
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