How a Heloc (Home Equity Line of Credit) can give you leverage to invest in more opportunities.
Updated: Jun 26, 2020
Have you obtained a Heloc on your Primary residence before? A Heloc (Home Equity Line of Credit) can give you leverage to invest in more opportunities. A strategy that a lot of people have employed for a long time. Some of the benefits of using a Heloc is that you are able to essentially borrow money from the equity of your house and then pay it off as you want, yes you will have to make at the very least interest payments on it. The Heloc works like a checking account, so if you use the money, you pay interest on it, if you don't use it, you don't pay anything. Where as a regular mortgage with a cash out you would start paying interest on the money right away. The major con to a Heloc is that the interest rate is typically higher than a mortgage and almost always is variable and tied to the federal bank.
Let me provide you a couple examples of some good uses of a Heloc:
Say you bought your house 10 years ago for 250k and now it's worth 500k. This means that you have 250k of equity in the house. The bank will not allow for you to loan that entire 250k as they want to have some cushion in case the market turns, but for a primary residence some banks will loan up to 90% of the value of the home. If you were to get a Heloc on your house you would be able to loan up to 225k (250k*90%). We know that banks typically want to have at least 20% of equity in a house if you were to refinance so it would be prudent to only use 200k (250k*80%) of the 225k. But that could be a nice down payment for another investment property that provides you money each month to pay down the heloc. After you have the new investment property working for you, you could refinance your primary residence to change the heloc from a variable interest rate to a fixed interest rate. In order to refinance, it's important that you only use up to 80% of the equity of the house, even though someone would be able to pull more money than that out for the ease of financing this makes it a lot easier
Some key things to think about when utilizing this strategy:
Select banks will allow for Helocs on investment properties
Helocs provide access to a lot of extra money, make sure to live within your means or use the money to create additional revenue to cover the future payment
Helocs can provide you the ability to take time to search for a house or investment. You are not paying for the money unless you use
If you have specific questions about the type of products out there you will need to talk with your bank and a mortgage professional.
Because Helocs are a loan, you don't have to pay taxes on the money that you use from them. Taxes will be due with the asset is sold.
Disclaimer: We are not CPA's or Attorneys and are not offering legal or accounting advice. If you have specific questions about your specific situation you should contact your CPA and or Attorney.
Feel free to contact us any time if you have additional questions.