Can you use a HELOC to buy another property?

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Can you use a HELOC to buy another property?

Picture this. You’re enjoying an outing in your favorite weekend getaway town. A for-sale sign in front of a charming little cottage catches your eye. Your heart beats a little faster because you can already see yourself spending all of your weekends and summers here.

You might already be sitting on (or in) the source of your down payment. The home you live in is more than a roof over your head. If you have equity, it’s also a financial tool that could help you reach your next goal.

Achieve explains how you could use a HELOC to buy another property.

Key takeaways:

HELOCs offer flexible funding that you could use for just about anything, including real estate.
HELOC interest rates are very competitive when compared to credit cards, personal loans, and many other forms of borrowing.

Can you use a HELOC to buy another property?

Yes, if you qualify for a home equity line of credit, you could use the money to buy your second home or an investment property if your lender allows it. You could use the funds from your HELOC to make a down payment, cover closing costs, or purchase another property outright.

You might be drawn to using a HELOC to buy another property for the following reasons:

You can borrow funds from your HELOC as needed. You’ll only pay interest on the amount you borrow. This may be especially attractive to someone only planning to borrow enough for a down payment, closing costs, or other miscellaneous expenses.
HELOCs typically offer lower interest rates than personal loans.
HELOCs usually have higher loan limits than personal loans.
HELOCs have flexible repayment terms that typically range from 10 to 30 years, to help you get the payment amount that works for your budget.

What types of property can you buy using your HELOC?

The type of property you can buy with a home equity loan or HELOC depends on your lender’s terms and your financial situation. However, here are some common choices:

Personal residence: Let’s say you plan to purchase a new home and rent out your current home. You can use the money from a HELOC to make that happen.
Investment property: You might use a HELOC to purchase a rental property, multi-unit building, or vacation home. If you plan on flipping homes, a HELOC may also be a good source of the funds to get started.
Land: One way to buy land for future development or as an investment is to borrow against the equity in your home.
Commercial real estate: Some lenders allow home equity loans to be used to purchase commercial property, although that’s not universal. It depends on your lender’s specific policy.

What are the pros and cons of using a HELOC to buy property?

Accessing the equity in your home to buy property may be a good move, but it’s important to understand the risks. Here’s a breakdown of the pros and cons:

Pros

Lower interest rate: As mentioned, a HELOC could have a lower interest rate than a traditional investment loan.
Flexibility: HELOCs allow you to borrow, repay, and borrow more as often as you like during the first few years of the loan (the draw period). You have flexible access to your funds you need when you need them.
Potential for a tax deduction: Interest on a home equity loan may be tax-deductible if the funds are used to buy or improve your home. Before borrowing money against the equity in your home, check with a tax professional to ensure that your plans meet the criteria.

Cons

Risk of foreclosure: HELOC interest rates tend to be attractive because your current home guarantees the loan. (HELOCs are mortgages.) If you fail to make payments, the lender can repossess your property, sell it, and recoup its losses.
Restrictions: Some lenders limit how funds can be used, particularly for investment properties.
Potential of overleveraging: When you borrow against your home, you add to your total debt load. Anything from a job loss to an illness could become a serious issue, straining your finances.
Variable rates: Most home equity loans have a variable interest rate, meaning your payments could change from time to time. Some HELOCs have fixed rates, however, which protects you from rate fluctuations.

What are some alternatives to using a HELOC to buy property?

A HELOC isn’t the only game in town when purchasing a property. Here’s a quick rundown of some other options:

Cash-out refinance: A cash-out refinance means you take out a new mortgage that’s bigger than your current mortgage. You use the new loan to pay off the old loan and get the difference back in cash. You could use that cash to purchase a property.
Seller financing: Some sellers may offer to finance a property directly, so you make fixed payments to them over time without having to get a separate loan.
Personal loan: It’s possible to use a personal loan for just about any expense. But rates tend to be higher and loan limits tend to be lower compared to HELOCs. You’d want to weigh your options and evaluate whether this is the way to go.
Bridge loan: A bridge loan is a short-term loan that helps you purchase a new property while waiting for your current home to sell.

What’s next?

Talk to HELOC lenders who can check your rate with a soft credit inquiry that won’t hurt your credit score. That’s a good way to find out if a HELOC is an option in your situation, as well as what terms you might qualify for.
Check the value of your home on a real estate site. Your current mortgage balance plus the HELOC you want should be under about 80% of your home’s value.
Pay down current debts, especially credit cards, if you can. The fewer bills you have to pay, the easier it will probably be for you to qualify for the HELOC you want.

This story was produced by Achieve and reviewed and distributed by Stacker.