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.