Best Tips for Using a HELOC in 2024 – Episode 1040

The HELOC, or home equity line of credit. is a great financial tool you can use to reach a variety of financial goals, whether you want to pay off high interest debt, invest in real estate, or pay down the principal balance of your primary residence. I get a ton of questions about using a HELOC, so this video is going to act as a resource to answer some of those most commonly asked questions.

If you’ve got equity in your home and you’ve ever considered using that equity to reach your financial goals, this episode of Investing in Real Estate is for you! Click play to learn my top tips for using a HELOC in 2024.

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How much can I borrow with a HELOC?

Most banks will allow you to access up to 85% of your available equity, but this can vary based on your lender and your personal finances

‌How does the interest rate work on a HELOC?

The home equity line of credit works differently than most financial products because it has a draw period and a repayment period. Here’s how it works: the draw period is usually 5-10 years. During this time, you only have to make payments on the interest. Then when the repayment period kicks in, you’re required to pay both interest and principal payments. The repayment period typically lasts 20 years.

Another thing that is different about the HELOC is that it has a variable interest rate. So unlike your mortgage, you aren’t locked into a certain rate. As baseline rates adjust, just like we’ve seen over the past few years, the HELOC’s interest rate will go up or down.

Where can I find a HELOC?

The best place to start is at your local rates and credit unions. Let me tell you why: these smaller institutions can usually offer the most favorable rates and terms. The other thing to consider is that different states have different laws, so staying local is going to be your safest bet.

‌What can I use the funds for?

There are really no restrictions on what you can use a HELOC for. I wouldn’t advise using it to buy liabilities, but it may be financially intelligent to use the funds to buy performing assets, make improvements to your home, or pay down higher interest debt.

How does a HELOC differ from a cash-out refinance?

A HELOC is sometimes referred to as a second mortgage, meaning it’s an additional product. A cash-out refinance, however, replaces your existing mortgage. Although the HELOC and the cash-out refinance serve a similar purpose, they’re two totally different financial products with different rates and terms. The HELOC is usually the cheaper way to borrow against the equity in your home. Personally, I’ve always used the HELOC – but your mileage may vary.

Can I get a HELOC on my rental property?

Maybe. It can be much more difficult to obtain a HELOC on a rental property than your primary residence. That being said, it is possible. For whatever reason, the banks often consider investment properties to be riskier. There’s not a big market for HELOCs on rental properties, but they do exist. Be prepared to shop around.

Are there any disadvantages?

Sure. The HELOC isn’t for everyone. If you’re in a position where you can’t afford the extra payment or your debt-to-income ratio would be negatively impacted by an additional loan, it’s probably not the correct strategy for you right now. It’s also worth noting that any time you unlock your equity, you’re leveraging against your home, which can be risky. Do your own due diligence, talk with your banker, and be sure to run the numbers before you go this route.

There are many more benefits to having access to a line of credit. It’s like having a backup credit card for a rainy day…. Except you can use it to purchase performing assets like rental real estate. Smart investors are always putting themselves in a position to access capital when they come across an opportunity to buy a solid investment. That’s what I like about the HELOC. Plus, if you don’t use the funds, you’re only out the closing costs and origination fees.

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