Can I use a HELOC to buy a second home or investment property?
Yes, you absolutely can use a HELOC to purchase a second home or investment property, and this can be a smart option.
What is a HELOC?
A Home Equity Line of Credit (HELOC) is funding that is secured by the equity in your home. It functions like a credit card. It is revolving debt that can be accessed as needed. Payment terms are often flexible, and some HELOCs offer interest-only payments until a specified future date. Another similar product is a home equity loan which is an installment loan where principal and interest payments are fixed for a certain term length. Both mortgage products provide the opportunity for a cash lump sum payment that can be used to purchase a second home.
HELOC Advantages
HELOCs are far superior to traditional mortgage loans when it comes to upfront loan costs. Mortgage loans carry significant upfront costs, usually thousands of dollars in closing costs and fees. Conversely, HELOC costs are often lower and some may have no closing costs or may only cost a home appraisal fee. HELOC payments are also flexible, allowing interest-only payments for a specified time period, which is called the “draw period”. This helps you with cash-flow if you need to make payments on two loans or need to invest in renovations. Because HELOCs are secured with your home as collateral, the interest rates are usually better than with personal loans or credit cards.
HELOC Example:
Current Home Value: $350,000
Current Mortgage Loan Balance $125,000
Total Equity: $225,000
Max. Loan Amount Loan-to-Value (LTV) @ 90%: $202,500
Loan Terms: 30-year (10-year draw, 20-year repayment period), 7% variable APR
Interest-Only Monthly Payments: $1312.50
Calculating Return on Investment (ROI)
Purchasing a second home or investment property is frequently a smart financial move when one of the homes will become a source of income for you in the near future, whether through renting or flipping it. A HELOC can help you acquire the property without significant upfront cash due to the cheap cost for funding and the lower interest payments during the draw period. However, it’s important to do the math: 1) to ensure that you can afford the extra payments while the second home is not income-producing, 2) that the return on investment will be recouped within an adequate period of time, and 3) that the ROI makes sense and that it’s the best opportunity available for you.
Summary
There’s not one single answer for everyone. It depends on your individual circumstances. The only way to know is to do the math.
Use our mortgage calculators to do the math and see what is your next best financial move.