Houses Under Fifty Thousand

Home Equity Line of Credit
for Investment Property

By Houston Neal

What is a Home Equity Line of Credit (HELOC)?

A Home Equity Line of Credit, or HELOC, is a type of loan in which the lender agrees to provide a maximum amount of money over a given period of time with the borrowers equity in his/her house as collateral. 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. You only pay what you use and the interest.

HELOC vs. Home Equity Loan

A HELOC differs from a conventional home equity loan because the amount of the loan is not given at the time of closing. In a home equity loan, the lump sum is given to the borrower up front. The terms then specify the monthly rate of payback as well as for how long. In the case of home equity, a conventional second mortgage is usually an amortized loan.

Choosing a heloc vs home equity loan, however, establishes a line of credit in which there is a drawing period established. This drawing period is set up between the lender and the borrower but can be anywhere between five and thirty years. This allows the borrower to dictate when to take out money for any needs that arise. The only monthly requirement for a HELOC is a minimum payment on the interest rate.

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. A home equity loan usually carries a higher interest rate because of the fixed-rate associated with it. The variable rate on the HELOC allows property investors to pay minimum payments on a low interest rate on a short-term property. Thus, a high turnover rate means lower and fewer payments made. Also, the interest paid on a HELOC is tax deductible, making it a little less expensive for property owners. While a HELOC allows the borrower to dictate the cash flow, property investment only works when there exists an appreciation of value in the property. Be sure to do the research required for such an investment.

Because a HELOC uses the equity built on your home as collateral, missed payments could result in a foreclosure to cover the costs of the HELOC. Always be aware of the risks of taking out such a loan so you can take precautions when investing.

Houses Under Fifty Thousand | Home Equity Line Of Credit