Pros
There is less risk to your primary residence. All HELOCs are secured with a property. This means that you won’t lose the property if the loan defaults. You can get a HELOC for your investment property, not your primary residence. However, you may lose your home if the loan is defaulted on.
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Flexible credit line: A HELOC gives you a flexible credit line that you can draw on for many years (up to the credit limit). It can be used for ongoing expenses and projects that you don’t know how much will cost. You don’t pay interest on any money that you withdraw so you can access a lot of funding potential without having to spend extra.
Cons
Carpenter says that HELOCs on investment properties can have a higher interest rate. They are more expensive than HELOCs for primary residences because they have higher interest rates, even though the borrower’s financial situation is similar.
There are potential fees that you may have to pay more: HELOCs often come with closing costs and fees that can increase the loan’s cost. Halm says that while some lenders will waive these fees for HELOCs on primary residences, they won’t waive them for HELOCs on investment properties.
It’s harder to find: Lenders who offer HELOCs for investment properties are less common than those who offer HELOCs for primary residences. It may be more difficult to find a lender and there will be fewer options when you shop around for the best rate.
Is it a good idea to get a HELOC to finance my investment property?
It depends on your financial goals and individual circumstances as well as the intended use of the HELOC.
If you are looking for flexible and ongoing financing that you can access for any purpose, a HELOC could work well. You should be comfortable with the variable rate structure of a HELOC. This can lead to your monthly payment and rate changing unexpectedly.
A HELOC has one advantage: you pay only interest on the amount you withdraw, and not the entire credit line. Halm says, “It’s an open credit line that you can tap into or not tap into as necessary.” But if you don’t tap into it, it’s not worth it.
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A HELOC for an investment property is typically more difficult to obtain than a HELOC for a primary residence. Sometimes, however, you might not feel comfortable lending your house as collateral. You may also be unable or unwilling to obtain a HELOC for your primary residence. This could happen if your loan-to-value ratio is too high. A HELOC can be an option for investment properties.
Alternatives to a HELOC in Your Investment Property
Here are some options for getting a HELOC on an investment property if you need quick funding or want to tap into your equity.
HELOC on your primary residence. HELOCs on investment properties are more risky for lenders because the borrower is less likely to make their payments on time since their home is not at risk. Lenders are more strict with their requirements for borrowers and often charge higher interest rates. HELOCs for a primary residence do not have this problem, so they may be easier to get and offer lower interest rates.
A home equity loan: A home equity loan is similar to a HELOC. It allows you to borrow against your home equity. Instead of HELOCs, which have revolving credit lines structures, home equity loans are fixed-rate installment loans. The full amount of the loan is paid out in one lump sum. Home equity loans for investment properties are also possible. However, you might be limited in your options, have stricter borrower requirements and pay higher interest rates.
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Cash-out refinance is a replacement for your existing mortgage by a new one with a higher amount. The difference is then paid to you in cash. Although you can refinance both primary and investment properties with cash out, the requirements for a loan are often more stringent and interest rates will be higher than those of a HELOC.
Carpenter suggests a personal loan. If you have a need for cash, you may also be able to get a personal loan from your bank or an online lender. Personal loans are usually unsecured. This means they don’t require collateral such as a HELOC, cash-out refinance or cash-out refinance. This means that they will typically have a higher rate of interest than HELOCs.
Best HELOC Lenders for Investment Properties
- Fifth Third Bank
Fifth Third Bank offers HELOCs in line amounts from $10,000 to $500,000. There are no closing fees, but you can lock in a fixed rate of interest on your HELOC by paying $95 for an additional fee. Fifth Third Bank HELOCs come with a 10-year draw period with interest-only payments and a 20 year repayment period. Fifth Third Bank offers HELOCs for condos, multi-unit and non-owner-occupied properties. However, 0.25% will be added on to your interest rate for each factor. Customers with Fifth Third Preferred checking accounts may have additional benefits.
- PenFed Credit Union
PenFed Credit Union offers HELOCs for non-owner-occupied properties with line amounts from $25,000 to $500,000. PenFed Credit Union offers HELOCs on non-owner-occupied properties for line amounts ranging from $25,000 to $500,000. The draw period for borrowers is 10 years, while the repayment period lasts 20 years. PenFed HELOCs offer the possibility to change from a variable rate to a fixed rate.
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- TD Bank
HELOCs are available from TD Bank on investment properties that have a credit limit between $25,000-500,000. Customers who have a personal checking account with TD Bank are eligible to receive a 0.25% interest rate discount. An origination fee of $99 is charged, along with a $50 annual fee after the one year anniversary. There is also a 2% early termination fee ($450 maximum) if the line is closed and paid off within the 24 month period. Additional closing fees may apply to lines of credit exceeding $500,000, investment properties, or co-ops.
