How to Use a Home Equity Line of Credit as an Investment Tool
A home equity line of credit, or a HELOC is often referred to as a second mortgage. When you take out a HELOC, the bank allows you access to a sizeable amount of cash. A HELOC is a loan based on the amount of equity in your home.
For example, let’s say that your primary residence is worth $100,000, and the remaining balance on your mortgage is $50,000. In this scenario, you have $50,000 worth of equity.
You are able to get a loan on your equity, usually between 80-90% of value. In our scenario, 90% of $50,000 is $45,000! When you take out a HELOC, the bank gives you a checkbook and a debit card. These funds are yours to use as you please.
Traditionally, a HELOC is used by homeowners to make home improvements, but there are no limits. You could buy a car, or pay off your credit cards. We’ve even used a HELOC to pay down our primary mortgage! You can hear more about that here.
But what we’re talking about today is using a home equity line to purchase rental real estate. Think about our scenario above. $45,000 is just enough to purchase a cash-flowing property in a stable market, and ultimately be on your way to attaining financial freedom.
Banks love to issue home equity lines of credit, because it’s a way for them to make money via interest. Many HELOCS are offered at an introductory rate in the first year. I always advise that people shop around at local banks and credit unions, and try to maximize their line of credit in the first year.
Want to hear how an investor just like you utilized this strategy? Listen here.