A home equity line of credit, popularly known as a HELOC, is what people can use if they have already purchased a home and have some equity tied up in it. For example, let’s say you’ve lived in your primary residence for 10 years, all the while paying down the mortgage and benefiting from appreciation. The appraised value is now $500,000 and your mortgage payoff is $250,000. You can take out a HELOC to tap into the $250,000 of equity you have in the property ($500,000 value minus the $250,000 loan outstanding). You can then use this $250,000 to purchase on an investment property.
You can also use a service like Hometap, which is an alternative to getting a loan. Hometap doesn’t provide loans but invests in the property’s equity. You get the cash to spend as you want, for example, on buying a second home or rental property. Then you settle Hometap’s investment in your home or sell the property before the end of the 10-year term.
- It’s a cheap financing option in terms of interest rates and closing costs
- You can pay it off whenever you like. You pay on the outstanding balance, not the entire HELOC
- The cost to close on a HELOC is much lower than the cost to obtain other financing
- HELOCs are the most flexible type of financing. You pay interest on only the amount borrowed at the time. In the example above, you would have $250,000 available to use, but if you used only $100,000 of it, you would owe interest on only that outstanding amount
- When used strategically and managed well, HELOCs are an excellent way to leverage your wealth to build more
- Essentially, you are spending the equity in your original home, which in effect increases the cost to retain it
- Most HELOCs have adjustable rates. This can be a challenge when trying to predict your financing costs over time