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We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money. HELOCs are hot right now. Why? The median U.S. home listing price was $435,000 in August 2022, according to the latest data from Realtor.com. This 14.3% year-over-year increase in home prices across the country, spurred by low supply and high demand in the housing market, means many homeowners have gained substantial amounts of equity they can now borrow against for quick cash through a home equity line of credit (HELOC). If you own an investment property and want to tap into funds for a home improvement project, to consolidate debt, or to purchase another property, you may be considering getting a HELOC on your investment property instead of putting your own house up as collateral. While HELOCs on investment properties are available, they tend to be more expensive and are harder to get than if you were getting one on your primary residence. Before you decide whether getting a HELOC on your investment property is the right financial move for you, you’ll want to know the requirements to get one, the pros and cons, and how it stacks up against other financing options. Can You Get a HELOC on an Investment or Rental Property?While it is possible to get a HELOC on an investment or rental property, it’s more difficult to find and get approved for one. That’s because lenders usually see them as bearing higher risks than if you were getting one on your primary residence. There’s an assumption that there’s less incentive for you to stay on top of your payments because you don’t live in that home. “With an owner-occupied property, the bank is assuming [that since] you live there, you’re going to make sure you pay for it so you don’t lose the house,” says Monick Halm, an investment property expert and founder of Real Estate Investor Goddesses. “They don’t feel that with a non-owner occupied [property] that there’s the same incentive.” Not all lenders offer HELOCs for investment properties, says Mike Carpenter, a mortgage originator based in Kirkland, WA, and founder of Mike the Money Man. Even if your financial profile would qualify you for a HELOC on your investment property, you may still find your options limited simply because fewer lenders offer this type of product. Requirements to Get a HELOC on an Investment propertyThe requirements to get a HELOC of any kind — whether on an investment property or principal residence — vary by lender, but there are some common factors lenders look for when evaluating an application:
Typically, lenders will have more stringent requirements on all of these factors if you’re taking out a HELOC on an investment property instead of a principal residence. To get approved for a HELOC on an investment property, you may need to have a lower loan-to-value ratio (meaning more equity in your home), lower debt-to-income ratio, higher credit score, and more cash reserves. The exact thresholds required will vary by lender, and it may be difficult to find out that information until you apply. Lenders might also look to see if you have a long-term tenant on your investment property, explains Halm. “They generally want to see a long-term lease versus a short-term one, and then they want [the property] to be occupied,” she says. “They’ll also want to see proof of income.” The lender will also want information about your other properties, says Halm. “They want to make sure you’re not using [the HELOC] to pay debt down on other mortgages you owe,” she says. HELOC Rates Are on the RiseThe highest inflation in 40 years has yet to wane. The Consumer Price Index showed prices up 8.2% year-over-year in September, barely an improvement from August’s 8.3%. That has implications for the Federal Reserve’s efforts to bring price growth down, but it also means a lot for consumers, especially those looking to borrow money. The Fed will likely continue to raise its benchmark interest rate – the federal funds rate – in its ongoing bid to stem demand and lower inflation. But that rate affects the cost to borrow money across the economy, particularly home equity lines of credit or HELOCs. HELOCs often have variable interest rates that are directly tied to an index – the prime rate – that moves in lockstep with the federal funds rate. When the Fed raises rates, it means HELOC borrowers pay more. Home equity loans with fixed rates aren’t as directly affected, but those rates are set based on the lender’s cost of funds, which also rises as rates go up. The economic situation means home equity rates are likely nowhere near done rising, experts say. “I don’t expect [rates] to rise at the rate they have been over the last nine to 12 months. But I think they will go up,” Kevin Williams, a CFP and founder of Full Life Financial Planning, told us. “I’m hopeful that they’ll slow down, but we’ve seen a lot of up and down so it seems like there’s still room for them to rise.” Advantages and Disadvantages of a HELOC on an Investment PropertyPros
Cons
Is It a Good Idea to Get a HELOC for My Investment Property?Whether it’s a good idea to get a HELOC for your investment property depends on your individual circumstances, financial goals, and intended use for the HELOC. A HELOC in general could be a good fit if you want a flexible, ongoing source of financing that you can tap into for virtually any purpose. However, make sure you’re comfortable with the variable-rate structure of a HELOC, which can cause your rate — and monthly payment — to unexpectedly change in the future. Pro TipHELOCs typically have a variable interest rate structure, meaning the interest rate could change at any time during the life of the HELOC. Some lenders offer a rate-lock option that lets you lock in a fixed interest rate, but that may come with additional fees or a higher starting interest rate. One benefit of a HELOC is that you only need to pay interest on the balance you withdraw, not the amount of your entire credit line. “It’s a line of credit that you can tap into, or not tap into, as needed,” says Halm. “But if you’re not tapping into it, you’re not paying for it.” Compared to a HELOC on a primary residence, a HELOC on an investment property will typically be both harder to get and more expensive. But, sometimes you may not feel comfortable putting your own house up as collateral, or you may be unable to get a HELOC on your primary residence — for example, if the loan-to-value ratio on your primary residence is too high. In that case, getting a HELOC on your investment property can be a viable alternative. Experts don’t recommend using a HELOC — or any type of debt — to finance an unsustainable lifestyle, but a HELOC can be a good strategy if you use the money wisely. For example, you can use a HELOC to pay for renovations on your property to increase its value, or use it for a down payment on another rental property, says Halm. In both those cases, the money spent could be considered an investment that will pay off in the future, and a HELOC can be an affordable and accessible way to access the funding you need. Alternatives to a HELOC for Your Investment PropertyIf you want to tap into your home equity or you need fast funding, here are some alternatives to getting a HELOC on your investment property:
Best HELOC Lenders for Investment PropertiesFifth Third BankFifth Third Bank offers HELOCs with line amounts ranging from $10,000 to $500,000. There are no closing costs, but there is an option to lock in a fixed interest rate on your HELOC for a $95 fee. HELOCs from Fifth Third Bank come with a draw period of 10 years with interest-only payments, followed by a 20-year repayment period. Fifth Third Bank offers HELOCs on condos, multi-unit, and non-owner occupied properties, but 0.25% will be added to your interest rate for each applicable factor. There may be additional benefits for customers with a Fifth Third Preferred Checking Account. PenFed Credit UnionPenFed Credit Union offers HELOCs on non-owner occupied properties for line amounts ranging from $25,000 to $500,000. The maximum combined loan-to-value ratio (CTLV) is 80%, meaning that the total value of all loans secured by the property (including HELOCs, home equity loans, and primary mortgages) cannot exceed 80% of the property’s value. Borrowers have a 10-year draw period, and the repayment period is 20 years. PenFed HELOCs feature the option to switch from a variable to a fixed interest rate. TD BankTD Bank offers HELOCs on investment properties with a credit line between $25,000 and $500,000. Customers with a TD Bank personal checking account are eligible for an interest rate discount of 0.25%. There is an origination fee of $99, an annual fee of $50 after the one-year anniversary, and an early termination fee of 2% of outstanding principal balance ($450 max) if the line of credit is paid off and closed within 24 months of account opening. There may be additional closing costs on lines of credit greater than $500,000, investment properties, and co-ops. Frequently Asked Questions (FAQ):Can I use a HELOC on a rental property?Using a HELOC on a rental property is possible, but riskier for the lender, so expect stricter lender requirements, higher interest rates, and less lenders in the market for rental property purposes. Can I get a HELOC for a second home?Yes, HELOCs are possible for second homes, rentals, or any other property you own. However, HELOCs are more difficult to qualify for and more expensive for when used on non-primary residences. What is the max HELOC amount?For line amounts greater than $500,000, maximum combined loan-to-value ratios are lower and certain restrictions apply. Maximum loan amount for primary residences is $1,000,000.
Can I withdraw money from my HELOC?During the term of a HELOC loan, you're able to withdraw the money as and when you need it up to the approved limit of the loan, known as the loan's drawdown period. You only pay interest on the amount you withdraw, not the total amount you've been approved for.
What is the monthly payment on a $50000 HELOC?For example, on a $50,000 HELOC with a 5% interest rate, the payment during the draw period is $208. Whereas, during the repayment period the monthly payment can jump to $330 if it is over 20 years.
How do you calculate how much you can get out of a HELOC?The lenders who offer HELOCs will extend a percentage of your home's value as your credit limit. They determine this amount by dividing the appraised value of the house by the amount remaining on your mortgage, and the amount you'd like extended.
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