Despite certain volatility, investing in real estate can be one of the more profitable opportunities an investor can pursue—projected by some to reach 8.1% next year. However, finding the initial capital to break into the market can be challenging for the average American.
One option for many investors is using a HELOC as a down payment on investment property purchases. Homeowners can leverage their home equity through a Home Equity Line of Credit (HELOC) and, in turn, use those funds for various purposes.
But can you use a HELOC to make a downpayment on an investment property? What are the potential benefits and risks?
We’ll answer these questions and show you how HomeEQ’s streamlined digital application can simplify the process, letting you know in minutes if you’re approved.
Apply with HomeEQ and get approved within minutes.What is a HELOC?
Think of a HELOC as a revolving line of credit—much like a credit card.
You’re borrowing against the equity in your property as the expenses arise, unlike a home equity loan, where you receive a lump sum and must start paying interest on it immediately.
With a HELOC, you repay it on your terms during the draw period.
Key features of a HELOC
- Flexible borrowing: Withdraw funds as needed during the draw period, typically 5–10 years.
- Interest-only payments: Many HELOCs allow interest-only payments during the draw period, keeping monthly costs low.
- Lower interest rates: Compared to pricer options like credit cards or personal loans, HELOCs tend to have lower rates.
Can you use a HELOC to make a down payment?
Yes, you can use a HELOC to fund a down payment on an investment property, provided the HELOC lender allows it.
Most lenders won’t restrict how HELOC funds are used, making them an excellent option for financing down payments on real estate investments.
Once approved, you use your HELOC for a down payment by withdrawing funds to cover the upfront cost of purchasing an investment property.
This way, you can enter the real estate market without liquidating savings or other investments.
Benefits of using a HELOC toward an investment property
Leveraging a HELOC for an investment property offers several advantages.
1. Access to significant funds
If you’ve built substantial equity in your primary residence, a HELOC provides access to a large pool of funds—especially useful for meeting the typically high down payment requirements of investment properties (20% to 25%, on average).
2. Low borrowing costs
The interest rates of HELOCs are generally lower than other loans—like personal loans or credit cards—making them a more affordable option.
3. Flexibility and convenience
With a HELOC, you withdraw funds as needed, avoiding the need to take out a fixed-sum loan. This flexibility ensures that you’re only paying interest on the borrowed amount.
4. No need to sell assets
A HELOC allows you to preserve your existing investments, such as stocks or retirement accounts, while still securing funds for your investment property down payment.
Risks of using a HELOC for an investment property
While using a HELOC has its advantages, it’s essential to consider the potential risks:
- Increased debt obligations: Borrowing against your home equity means taking on additional debt—repaying both the HELOC and any loans on the investment property.
- Variable interest rates: Most HELOCs have variable interest rates, which means fluctuations can happen.
- Risk to your primary residence: Your HELOC is secured by your primary home. If you’re unable to repay the HELOC, you could risk foreclosure.
- Impact on your credit: Using a significant portion of your HELOC credit limit can increase your credit utilization ratio—this might potentially lower your credit score.
How to use a HELOC for an investment property down payment
If you’ve decided to use a HELOC for your investment property, follow these steps to maximize its benefits while minimizing risks.
Evaluate your home equity
Determine how much equity you have in your primary residence. Most lenders say you can borrow up to 80% of your home’s value minus any existing mortgage balance.
Check lender policies
Ensure your HELOC lender permits the use of funds for investment property purposes. While most do, some may have restrictions.
Apply for a HELOC
Platforms like HomeEQ make it easy to apply for a HELOC online. Gather necessary documents—such as proof of income and property details—and complete the streamlined application process.
Calculate your budget
Determine how much you’ll need for the investment property down payment and ensure it fits within your HELOC credit limit. Consider additional costs like closing fees, property taxes, and maintenance expenses.
Use funds strategically
Withdraw only what you need for the down payment and keep repayment terms in mind. Aim to pay off the HELOC during the draw period to minimize long-term interest costs.
Monitor your finances
After purchasing the investment property, carefully manage your rental income and expenses to ensure you can cover both the property mortgage and HELOC payments.
Why choose HomeEQ for your HELOC needs?
HomeEQ offers a secure and simple platform for homeowners to access their home equity. Our online application process ensures quick approvals.
- Streamlined application: Complete your loan approval in 10–15 minutes with our step-by-step guidance.
- Secure verification: We partner with trusted services to protect your personal and financial information.
- Transparent terms: Enjoy clarity with no hidden fees or surprises in your HELOC terms.
- Expert support: Our professional team is ready to answer your questions and assist you in making informed decisions about your home equity.
Using a HELOC for an investment property | The wrap-up
Using a HELOC toward a down payment on an investment property can be your key to entering the real estate market, providing access to affordable funds and enabling you to capitalize on potentially lucrative opportunities.
However, it’s important to weigh the benefits against the risks and ensure that your investment plans align with your financial goals.
With HomeEQ, accessing your home equity has never been easier.
If you’re ready to explore your options, complete HomeEQ’s simple HELOC application and learn more about your home equity options.
Start today, and take the first step toward achieving your real estate investment goals.