Working With A Home Equity Line Of Credit

One of the secrets to being a good real estate investor is to think outside the box. There will be times where you need to be creative to get a deal done. A common hurdle for investors is finding money to fund deals. Whether you are looking for capital to put as a down payment or to buy a property free and clear, you may have more options than you think. Sometimes that money might be right in front of you. With every property you own, you may have equity that you didn’t know you had. Even if you knew it was there, maybe you weren’t sure how to tap into it. A HELOC (home equity line of credit) can be just the tool to give you the funds you are looking for. If you are thinking about borrowing against your property, here a few things you should know:

What is a HELOC?

A home equity line of credit is a lien against your property. You are taking a loan out against the available equity. While having available equity is necessary, this alone does not guarantee approval. There are specific guidelines and requirements for approval. In most cases, you need at least a 700 credit score and 75% equity. You will have to verify income, and may even need to have asset reserves. If approved, the closing process is far less expensive than a traditional mortgage. You do not need an attorney or have to escrow property taxes. Some lenders offer HELOC programs for less than $500. This alone makes it an attractive option. Furthermore, HELOC’s offer an interest only payment option based on the prime rate or other indexes. This will allow borrowers to pay a minimum payment for the first twenty years while still paying down the loan balance. For real estate investors who see large chunks of money a few times a year, this can be the perfect tool to grow your business.

HELOC For Purchases

If you have an open line and are looking to use it as a down payment, there are a few things you need to know. First, you need to know that your payment is based off of the amount you use. Unless you took a fixed rate option, this monthly payment can change from month to month. While the prime rate hasn’t moved too much in recent years, there is nothing saying it won’t. You have to factor this into any forecasting or budgeting you do on the purchase. Secondly, you should talk to your lender and find out what the seasoning rules are. It is not enough to open a line and immediately use these funds for a down payment. Most lenders want to see the money in an existing account for at least sixty days. Plus, with any new account you open, you need to factor the debt into the monthly payment. There are occasions where the new payment can push your debt over acceptable levels. If you are considering opening up a line for a specific property, you should talk to a broker or lender before doing so.

HELOC vs. Fixed Rate

As we mentioned, the most popular method of borrowing money for a HELOC is through the adjustable option. You pay the minimum payment for the first 120 months, then pay down the principal and interest the following 120. If you are not comfortable with this option, you can go with a fixed rate. In doing so, you lock into a slightly higher rate, but have the comfort of knowing the exact payments for the next twenty years. You may be able to pay down the principal, but would still have the same monthly payment only with a reduced balance. There really is no right or wrong option, only what you prefer. If you are closing deals consistently, you may want an interest only option that reduces your payment and allows you to pay down the balance. Another positive feature of the line is that you only pay what you use. You can take a line out for $25,000, but if you don’t use it you don’t pay anything. With a fixed rate loan, you make the same monthly payments as soon as you get your money. Like any other source of money, you need to know all of the terms and conditions before you do anything.

Equity Reduction

As the name indicates with a HELOC, you are tapping into the equity of your property. This may seem like a great idea now, but it will catch up with you when you decide to sell the property. If you have no visions of selling for some time, this can be a viable tool. If you are considering putting the home on the market in the short term, a HELOC may not be the best strategy for you. Before you even apply for a HELOC, you need to have a solid idea of what you plan on doing with the funds. Your goal should be to use this money to get a greater return than what you are paying. Using it for new furniture, cars or a nice vacation will quickly put you in the hole and leave your portfolio with a hole in it. Understand that the money isn’t free and you are losing equity with every HELOC you take out.

A HELOC can be a great way to get you the capital you need to grow your business, but it is important to understand all of the terms and options before you do anything.