October 31, 2022 by Leave a comment

If you are fortunate enough to own an investment property, you probably know something about generating additional income streams. You’ve heard about getting a home equity line of credit on your primary residence – but what about a rental? 

If you are looking for more ways to access capital, you may be wondering if you can get a home equity line of credit, or HELOC, on a rental property. The answer is yes, though there may be some hoops you’ll need to jump through. If you’ve got adequate equity in your investment property that you’re looking to capitalize on, keep reading to learn more about how to get a HELOC on a rental property. 

What is a HELOC?

A HELOC, or home equity line of credit, is a loan that uses the equity you’ve built up in your home as collateral. According to BankRate, you can expect to borrow as much as 85 percent of the value of your home after deducting any remaining mortgage balance. 

You draw on the capital as you need it up to a certain amount, similar to a credit card, and therefore only use what you need. There is a draw period during which the borrower can access capital and repay it to the lender, plus interest, allowing the credit line to be replenished. 

Interest rates on HELOC loans can be variable in nature. Therefore, monthly payments will fluctuate based on the economy’s prime rate and the size of the home equity line of credit. However, some lenders may offer fixed-rate options on a HELOC. 

One such feature is to convert a portion of the credit line into a home equity loan, allowing the borrower to repay the funds over the original HELOC term. Locking in the rate is advised, when possible, in a rising rate environment.

HELOC products are applicable for both primary residences and investment properties, though they are more common for the main home. However, that doesn’t mean you can’t get a HELOC on a rental property. The property serves as collateral on a HELOC, and if payments are missed, the borrower is at risk of defaulting on the loan and losing their home.  

Can You Take Out a HELOC on a Rental Property?

The short answer is yes – you can take out a HELOC on a rental property. However, you must have enough equity built up in the home to do so. Use the funds to make upgrades or repairs on the property to continue optimizing your rental income. 

Like any loan, you’ll need to qualify for a HELOC on a rental property. You may find that the lending standards for a HELOC on a rental property are higher than those associated with the primary residence. More factors come into play, such as the payment history of the renter on the investment property. HELOCs for rentals are also not as popular as their counterparts, and lenders can be harder to come by.  

If you are in a position where you could benefit from a HELOC on a rental property, let us know. Total Mortgage has loan experts standing by at locations across the country to get started on your application today and bring you one step closer to your goal. 

How to Get a HELOC on Rental Properties 

Before you pursue a HELOC on a rental property, you should take some steps of preparation that will save you time in the long run. These include: 

  • Commission an updated appraisal on your home. The home’s value will help the underwriter determine a HELOC’s size on a rental property. 
  • Ensure your debt-to-income ratio is no higher than 45%. This is part of the lending standard. Also, keep cash reserves of several months readily available.  
  • Keep your credit score at 700 or above. In addition, make sure you have a history of paying your bills on time, which is a good sign that you will repay your HELOC and won’t lose your home in foreclosure.
  • Be sure you’ve got a high enough income so the lender has confidence that you’ll be able to repay the line of credit and not end up in foreclosure. 

Total Mortgage’s loan experts can advise you on the specific criteria you will need to increase your chances of approval for a rental property HELOC.

Pros and Cons of taking a HELOC on rental property

There are multiple advantages tied to taking out a HELOC on a rental property, including: 

  • Tax advantages. Borrowers who get a HELOC on an investment home and use the proceeds to improve the property can use that expense as a tax write-off with the IRS. 
  • Borrowers are likely to secure a lower interest rate vs. what they would receive on credit cards and other lines of credit. 
  • Homeowners can invest in the property to improve the overall appeal and value of the home.
  • Getting a HELOC on a rental property is a way to tap into the equity on your home without having the added expense of closing costs that accompany taking out a mortgage in the first place. 

Taking out a HELOC on a rental property also has a few disadvantages you might want to be aware of, including:  

  • The borrower must be disciplined to repay the credit line considering the variable rate. In this case, monthly payment amounts will vary based on the economy’s latest prime rate; therefore, budgeting could prove challenging. A silver lining is a ceiling on the amount that the rate can rise during the term of the line of credit.  
  • The credit standards are strict. In addition, the payment history of the renter at the property could play into the lender’s credit decision.  

Explore Loan Options from Total Mortgage

Having a HELOC on a rental property gives the homeowner options to invest in the investment home that might not otherwise be available, thanks to the sum of cash at their disposal. Don’t wait too long until you know you can get a HELOC on a rental property. 

When it comes to real estate, there is no time like the present, and Total Mortgage has offices located across the US to ensure you won’t miss a beat. Reach out to one of our loan experts today so you can move forward with a HELOC on a rental property.

cwessman@totalmortgage.com'

Carter Wessman is originally from the charming town of Norfolk, Massachusetts. When he isn’t busy writing about mortgage related topics, you can find him playing table tennis, or jamming on his bass guitar.


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