You may have heard that all debt is bad. Although not all debt is created equal. Debt can be used as a tool to create greater wealth. Of course, this is only true when used carefully and wisely.
One way that some investors have used debt to their advantage is to make use of a Home Equity Line of Credit (HELOC). It’s a line of credit that can be used to purchase new investments and make debt work for you.
In this episode, Dr. Kim will discuss how utilizing a HELOC might make sense for you.
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Now, let’s look at what we discussed in this episode:
- Definition of HELOC
- How Home Equity Loan (HEL) different from a HELOC
- The use of a HELOC
- Take a HELOC out on an investment property
- HELOC vs. cash-out refinance
Here’s a breakdown of how this episode unfolds…
[3:53]
At its most basic level, a HELOC is simply a line of credit, much like a credit card. To secure this line of credit, you would put up your property as collateral. There is also a time limit on how long you can pull money on this line of credit, known as the draw period. The average term is typically 10 years.
[5:45]
A home equity loan (or sometimes referred to as a second mortgage) is different because rather than drawing from a line of credit source when you want, you have to take the full amount of the loan up front. Then you’re paying interest from day 1.
[6:06]
Why use a HELOC? Some people like having access to the equity in their homes and really want access to cash quickly and on demand.
[8:06]
When used correctly, HELCO can help accelerate the building of your investment portfolio.
- Help with down payment
- Help purchase a property with cash
- Invest in a passive real estate deal when you don’t have cash on hand, use it in a syndication or fund.
[11:50]
Traditionally, HELOCs are often thought of in relation to a primary residence. However, there is absolutely no reason you can’t do the same on a rental property.
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[12:45]
Another popular way to leverage equity comes in the form of a cash-out refinance. A cash-out refinance, on the other hand, pays off the existing mortgage and takes its place as a different mortgage with different terms. A HELOC has a variable interest rate, which can fluctuate along with the US Prime Rate.
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