What is it, where can I put one, and how does a HELOC work?
The amount of HELOCs in the US increased by 30% from 2021 to 2022. Why?
It can be some of the most flexible, least expensive credit for many people – especially real estate investors.
But how does a HELOC work? Let’s go over the basics.
What Is a HELOC?
A HELOC is like a big line of credit based on the equity you have in a piece of real estate. You can think like a big credit card on a property.
If a property you own is worth more than the amount you owe on it, then you could be eligible for a HELOC. You can use this line of credit for anything you want.
This line of credit is typically in second position. It works similarly to a credit card in the sense that you can use it and pay it off over and over.
How Does a HELOC Draw Period Work?
The draw period is the timeframe the credit union or bank allows you to use the line of credit. They typically offer a 5 or 10-year draw period. Within that period of time, you can borrow money and pay it back over and over.
Once the draw period ends, you can’t use the HELOC anymore – you just have to pay it off. It stops being a line of credit and now acts like a fixed mortgage you have to either:
- Pay off over time.
- Refinance into a new HELOC with a new draw period.
Can I Only Have a HELOC on the House I Live In?
You can do a HELOC on both your owner-occupied residence and your rental properties.
A few things to keep in mind:
- A HELOC doesn’t work on a flip – but it does on a completed rental property.
- The loan-to-value on a rental HELOC will be less than one on your own home.
- Some investors have 5-10 HELOCs on different properties. It’s a common strategy.
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