Is a home equity line of credit a good funding option for you? Here are a few HELOC pros and cons.
A Home Equity Line of Credit (HELOC) can be a great option for real estate leverage.
However, like any financial product, there are both advantages and disadvantages to using a HELOC for real estate investing.
Let’s explore the pros and cons of HELOC financing, so you can decide if it’s the right choice for you.
Pros of a HELOC
- Little to no fees. Sometimes, you might have to pay $100 or $200 to get a HELOC on your property, but there are usually little to no fees.
- Lower rates. You’ll see adjustable rates or fixed rates. Depends on what you get, but a HELOC is usually cheaper than private money or hard money. Rates could even be as low as bank financing. You don’t pay interest unless you’ve taken money out.
- Quick funding. You can fund a deal in as little as one day, giving you more control over the process. You can get the money as a wire from a bank, a check, or even a debit card connected to the line of credit.
Cons to This Line of Credit
- You must own a property. You need to own a property with equity to get a HELOC. In your owner-occupied property, most banks will go up to 95-100% of the equity. So even if you only have $20,000 in equity on your home, you can still take it out for gap funding or carry costs, even if you don’t get 100% HELOC financing.
- You need good credit. Most banks require you to get approved through income. Both credit and debt-to-income are important factors in whether you can get a HELOC or not.
- Misuse of funds. A HELOC is as easy to misuse as a credit card is. There’s always the risk that if you don’t pay back the funds when your real estate project is done, you’ll have too many liens on your home. Treat this line of credit like a business, and pay it off once you sell or refinance a property.
If you want help figuring out which HELOC is best for you, download this free, quick HELOC questionnaire.
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