If you are a real estate investor, you understand that cash is king. Sure, you want to use your cash to make more money by investing in attractive properties, but you also need to have plenty of liquid cash available. That way, you can pounce on deals as quickly as possible, taking advantage of them before they are gone. At the same time, you might have a lot of money tied up in specific properties. That is where a home equity line of credit, also known as a HELOC, can be helpful. What do you need to know about a HELOC, and how can you use it to help you as a real estate investor?
A HELOC Is a Lien Against a Property
First, understand that a HELOC is a lien against a property. That means that it will be a potential source of debt when you go to sell the property. If you try to sell your property without paying off your HELOC, some of the proceeds from the sale of the property will be used to pay off the line of credit before you get the rest of the proceeds back.
Because it is a lien against your property, you can use it as a first, second, third, or even for the mortgage. If you do not have a mortgage on the property, you can still take out a HELOC. It simply means that your HELOC will act as your first mortgage. On the other hand, if you already have a mortgage on the property, then your HELOC is going to fall in the second position. Even though there are some people who hesitate to take a lien out against a property, there are situations where a HELOC can be beneficial.
A HELOC Is Not That Different From a Credit Card
When you are trying to figure out how to use your HELOC, you should view it as a credit card. Essentially, the bank will set a limit on the amount of money it will give you. It will be dependent on the amount of equity you have in the home. Then, you are free to use the key lock to do just about anything you want. For example, if you want to use the money to complete a home improvement project, you can do so. Or, if you want to use the money to pay off other sources of debt, such as a credit card, you can do that as well.
Similar to a credit card, you do not necessarily have to pay it in full immediately (but, with a credit card, it is prudent to do so when you can). The only payment you are required to make on your HELOC every month is the interest. Keep in mind that you will eventually have to pay off the principal. Even though the bank may set a limit by which you have to pay off the HELOC, most lenders are going to be flexible with you. You will have to pay off the loan before you sell the house.
A HELOC Can Help You Save Money
If you need a quick source of cash, you should consider going with a HELOC. It can help you save a significant amount of money because the interest rate on a HELOC is generally lower when compared to other options. Essentially, you will be collateralizing this loan with your house. Therefore, because the loan is collateralized, you should receive a lower interest rate when compared to other sources of debt, such as a personal loan or a credit card.
At the same time, the interest rate will vary depending on a number of factors. Some of the factors that will influence the interest rate you receive include:
- The amount of money you decide to borrow
- The current market rate
- How quickly you want to pay back the loan
- The value of your house
- The amount of equity you have in your house
- Your credit score
There are some people who do not necessarily like tying a loan to their house; however, this can save you thousands of dollars over the life of the loan because you should receive a lower interest rate. It is important to work with an expert who can help you figure out if a HELOC is right for your needs.
The Borrowing Limit Could Be Very High
Furthermore, many people enjoy taking out a HELOC because the borrowing limit on the loan could be extraordinarily high. For example, if you do not owe anything on your house, meaning that you do not have a mortgage, you could be allowed to borrow hundreds of thousands of dollars at once. This can give you a tremendous amount of cash that you can use to purchase other investment properties, allowing you to expand your portfolio.
Different lenders will have different ways of handling the limit on your HELOC. In some cases, the lender may allow you to borrow up to 80 percent of the value of your house. In other cases, you might be allowed to borrow up to 90 percent of the value of your house. If you still have a mortgage on your property, your borrowing limit might be a bit lower because you already have a mortgage; however, you will still have plenty of flexibility.
A HELOC Provides You With a Variety of Benefits
There are plenty of reasons why a HELOC could be an attractive option for a real estate investor. They include:
- You have the flexibility to pay off the HELOC as quickly or as slowly as you would like, as you generally only have to pay the interest on the loan every month.
- You can access a large source of cash quickly, which gives you the flexibility to purchase more properties.
- The interest rate on the loan is generally low when compared to other options because it is collateralized against the house.
- You may be able to deduct the interest on your HELOC on your income taxes, but it is important for you to talk with a tax professional before doing so.
Clearly, there are a lot of reasons why real estate investors are interested in a home equity line of credit. It is important for you to work with an expert if you are interested in taking out this type of loan. That is where our team can help you.
Work With Barrett Financial Group if You Are Interested in a HELOC in AZ
If you are looking for a quick source of cash, you should consider taking out a home equity line of credit. This can give you the flexibility you need to expand your rental portfolio, but you need to work with the right lending team. We are Barrett Financial Group, and we are hard money lenders in Arizona. We have a significant amount of experience working with investors of all backgrounds, and it would be our pleasure to help you as well. We can review all of your lending options with you, helping you make the right decision for your needs. Contact us today to speak to a member of our team!