Buying a second home doesn’t have to just be about luxury, it can also be about building a rental property to generate income. Whatever reason you’d like to buy a new property for, the equity in your primary home could be a great option to finance your real estate venture. A Home Equity Line of Credit, or HELOC, is a flexible and lower interest option to put the equity in your home to work for you!
Let’s take a quick look at how a HELOC works:
Home Equity Line of Credit (HELOC): This works more like a credit card, as you’ll have access to a set amount of money and can draw down funds whenever you need cash. You then re-borrow and repay it as many times as you want during the draw period, and you won’t be charged interest until you withdraw funds. Keep in mind that the interest that is charged will most likely be a variable rate, which means interest costs can go up or down depending on the Prime Rate.
There are many product options to consider when financing a vacation or rental property – you could take out a mortgage for the property, cash out investments, or tap into your savings. Or a HELOC helps you keep your funds in your pocket! We keep talking about equity, but what does that mean? Home equity is defined as the difference between the current value of your primary property and the remaining mortgage balance. This equity is the opportunity to put the value of your primary residence to work towards your financial goals and endless possibilities!
Using your home’s equity to pay for a second property can work in your favor as HELOC rates can sometimes be lower than a mortgage rate because the equity loan or line of credit is secured by your primary residence. Additionally, some lenders will offer better terms for people who are purchasing a property with home equity rather than as a new mortgage because, they expect that you’ll be more committed to making payments on time because your primary residence is on the line. If your lender views you as a low-risk borrower in this way, it may work in your favor and land you a lower rate and better terms.
The condition of your second property is also something to consider when choosing an investment option. If your second investment property is move-in ready your better option would be a traditional home equity loan. It ensures that once you begin to rent the property, you will be able to make the monthly payments and hopefully generate a profit. If your second property is a “fixer-upper” a HELOC is a great way to fund and budget the renovation project. The credit will allow you to access the funds a little at a time as your buy the home and make improvements, and you’ll only have to pay interest on what you use.
With a bit of sweat equity and a HELOC your second property possibilities are endless! You’ll be able to manage the finances of two properties with the ability to have a beautiful place to relax or a freshly renovated building to start generating income! As always, check with your lender and financial advisor for advice on your specific real estate situation.
For more info and some tax information, check out this article.