Can I Use a HELOC on an Investment Property?
If you own an investment property, you might be sitting on a goldmine of opportunity through your home’s equity. A great way to tap into that equity is by using a HELOC (Home Equity Line of Credit).
But how does a HELOC work for investment properties, and is it a smart move for you? Let’s discuss what you should know about using a HELOC on an investment property—how it works, why it’s beneficial, and what you need to watch out for.
And if you're ready to make the most of your equity, Rate’s fast Fixed-Rate HELOC offers a simple digital application process, quick access to cash, and no upfront costs—perfect for funding your next investment.
Why Use a HELOC on an Investment Property?
Real estate investors are always looking for ways to improve cash flow, and a HELOC can be an excellent tool for that. You can access the equity you’ve built in your property without selling it.
The flexibility a HELOC provides is one of the biggest reasons many other homeowners use it.
Leverage Existing Home Equity to Build Wealth
With a HELOC, you don’t need to sell your investment property to access your equity. You can pull from your existing equity to fund new deals, make home improvements, or even use the funds as a down payment on another investment property.
If you have enough equity, it’s like unlocking a revolving line of credit that you can tap into whenever you need it.
Potential Tax Advantages of a HELOC on an Investment Property
Although mostly uncommon, you can also benefit from tax deductions. The interest you pay on the HELOC may be tax deductible, especially if the funds are used for property renovations or home improvement projects.*
This is a massive advantage compared to other financing options like personal loans or credit cards, where the interest isn’t deductible.
Flexibility for Real Estate Investors
What homeowners enjoy most about a HELOC is its flexibility. In some cases, you only pay interest on what you draw, not the full loan amount. This makes it ideal for real estate investing, where cash flow can fluctuate.
Alternatively, with some lenders like Rate, the draw period gives you time to access funds as needed, which is particularly useful when unexpected repairs or opportunities arise.
How Does a HELOC Work with an Investment Property?
A HELOC works similarly for investment properties as it does for primary residences, but there are some key differences. Let’s dig into how you can expect a HELOC to work if you're using it for an investment property.
Key Approval Criteria for Investment Property HELOCs
Lenders are more cautious when it comes to investment properties.
Higher Credit Score Requirements
HELOC lenders tend to set higher credit score requirements for investment properties compared to primary residences. This is due to the increased risk associated with investment properties.
Typically, lenders look for a credit score of 700 or above, as borrowers with stronger credit histories are viewed as more financially responsible, which is crucial when managing a second home or rental property.
Larger Cash Reserves
Lenders will also require you to have more substantial cash reserves when applying for a HELOC on an investment property.
These reserves act as a financial cushion, ensuring that you can cover the costs of your primary mortgage as well as additional HELOC payments.
Most lenders require at least six months' worth of mortgage payments in reserve, depending on your financial situation and personal finance goals.
Lower Debt-to-Income (DTI) Ratio
A lower debt-to-income ratio (DTI) is critical for securing a HELOC for an investment property.
Lenders generally prefer a DTI below 43%, which indicates that you have a manageable amount of debt relative to your income.
This reassures lenders that you can handle the added debt burden from the HELOC while keeping up with other financial obligations.
Rental Income Sufficiency
Investment property HELOCs also require proof that your rental income is sufficient to cover both the primary mortgage and any additional debt from the HELOC.
Lenders will evaluate your property’s rental income to ensure it generates enough cash flow to cover existing debts.
Stricter Regulations
When applying for a HELOC on an investment property, you'll likely face stricter lending criteria compared to a primary residence to offset the increased risk of lending on non-owner-occupied properties.
These tighter requirements help lenders manage the additional risk associated with investment properties, ensuring they protect their investment while offering financing options for borrowers looking to leverage their property equity.
Loan-to-Value Ratios and How They Affect Your HELOC
The loan-to-value (LTV) ratio is crucial when applying for a HELOC. Lenders use this ratio to determine how much of your property’s equity you can borrow.
Typically, for an investment property, lenders allow a lower LTV ratio compared to a primary residence.
This means you might not be able to borrow as much as you would on your own home, depending on the property value.
Can I Use Funds from a HELOC as a Down Payment on an Investment Property?
Yes, you can! Many investors use HELOC funds to make down payments on new property purchases. It’s one of the most common strategies for real estate investing.
Just make sure you crunch the numbers to ensure you can handle both the HELOC payments and the new mortgage.
Common Repayment Terms and Options for Investment HELOCs
HELOCs offer a lot of flexibility when it comes to repayment.
While some lenders offer interest-only payments which helps keep monthly payments low in the beginning, other lenders like Rate, offer a fixed interest rate versus the traditional variable rate.
These benefits during the repayment period give real estate investors more room to maneuver financially, allowing different options during months when cash flow is tight.
Is There a Difference Between a HELOC on Rental Properties and a Primary Home?
Absolutely. For one, lenders tend to charge higher interest rates on HELOCs for rental properties compared to primary residences.
The risk is higher for the lender because rental income can fluctuate, and there’s a greater chance of foreclosure.
Additionally, you may face stricter lending terms, like a lower LTV ratio and a higher minimum credit score.
In some cases, you might even need a second mortgage or consider other financing options like a cash-out refinance to secure better rates.**
Pros and Cons of Using a HELOC on an Investment Property
Pros
- Access flexible funds during the draw period
- Potential tax benefits (uncommon but possible)
- Lower interest rates than personal loans or credit cards***
- Funds can be used for property renovations
- No need to sell your property to access equity
Cons
- Variable interest rates can increase over time
- Risk of foreclosure if payments are missed
- Higher interest rates for investment properties
- Cash flow issues may arise if rental income is insufficient
Do I Have Other Options Than a HELOC on an Investment Property?
A HELOC isn’t your only option when it comes to financing an investment property. Let’s take a look at some alternatives.
Comparing HELOC to Home Equity Loans
While a HELOC gives you a revolving line of credit, a home equity loan provides a lump sum. If you need a large amount of money upfront, a home equity loan might be better.
However, you’ll start paying interest on the full loan amount immediately, which could strain your cash flow.
A home equity loan might also offer lower interest rates than a HELOC, depending on your lender.
Who is eligible?
To qualify for a home equity loan, you generally need 15-20% equity in your property and a minimum credit score of 620. Higher scores may help you secure better rates. Lenders also look for a debt-to-income ratio (DTI) under 43%.
Cash-Out Refinance vs. HELOC: What’s the Difference?
Cash-out refinancing is another popular option for real estate investors. You refinance your first mortgage for a larger amount, take out the difference in cash, and use it for your next investment.
One advantage is that you lock in a fixed interest rate, unlike a HELOC, which typically has variable interest rates.
However, cash-out refinancing often comes with high closing costs, and it might not be ideal for someone trying to maximize their home’s value for future investments.
For those planning home improvements on an owner-occupied property, cash-out refinancing could offer tax benefits.
Who is eligible?
To be eligible for a cash-out refinance, you generally need at least 20% equity in your home.
Lenders also look for a credit score of 620 or higher, though some may require a higher score depending on the amount of equity you’re tapping into.
Additionally, you’ll need a low DTI ratio, usually below 43%, and proof of stable income to qualify.
Using Private Money or Hard Money Loans
Private and hard money loans are another option if you need quick financing. These loans are often used for short-term projects like house flips.
However, they come with higher interest rates and shorter repayment periods, making them riskier for long-term real estate investing.
For some, an unsecured personal loan might even be an alternative, though the interest rates are typically higher, and the loan amount is usually smaller.
Who is eligible?
Eligibility for private or hard money loans is based primarily on the property’s value rather than your credit score.
Lenders typically require collateral and a solid exit strategy, like selling or refinancing quickly. A loan-to-value ratio of 60-70% or lower is usually needed to qualify.
How Can I Start the HELOC Process Today?
Tapping into your investment property’s equity with a HELOC is a smart way to boost your real estate strategy.
Rate's Fixed Rate HELOC offers stability with predictable payments, no upfront costs, and quick access to cash when you need it.
With a simple digital application process, you can secure funds faster, helping you take advantage of investment opportunities or financing renovations without the stress of fluctuating interest rates.
Ready to get started? Explore Rate’s HELOC options today and put your home equity to work for you.
Rate, Inc.'s HELOC is a fixed-rate open-end product using your home as collateral. Not available in all states. Go to rate.com/HELOC for information including important property and borrower requirements and restrictions which impact rate and max available loan amount. Subject to approval.
*Rate, Inc. does not provide tax advice. The consumer should always consult a tax advisor for information regarding the deductibility of interest and other charges in their particular situation.
**Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principle amount and will be paid off over the full loan term. Contact Rate, Inc. for more information
***source: https://themortgagereports.com/98026/heloc-vs-credit-cards