Who Offers HELOC on Investment Property?

A HELOC on investment property is offered by RenoFi’s lending partners, along with banks, credit unions, and loan brokers with different terms and loan costs. Taking out a HELOC on your investment property allows you to access funds by tapping into the equity of the investment property itself, without affecting the equity of your primary residence.  

Most lenders provide loans capping at 75% of your investment property’s equity, compared to 85% or 90% when using a primary residence. You can spend money from the HELOC and make complete or partial repayments monthly, but it’s not intended to cover minor expenses. 

At RenoFi, we want to help you understand all of your borrowing options. Here’s what you need to know about HELOCs and investment properties.

How a HELOC Works

One way to think of a HELOC is to compare it to a credit card. The lender sets a limit on the money that you can borrow and you make repayments with interest. It offers a flexible repayment period, allowing you to make weekly or daily payments as needed. Its interest rate is lower than personal loans and credit cards but higher than mortgage rates. 

HELOC terms vary, but the most common draw period is ten years, and the repayment period lasts about 15 years. During the draw period, the borrower can use their maximum credit line limit and make interest payments only. After the draw period, they must make bigger payments to cover the balance they owe on their credit line. 

HELOC Requirements

A few factors determine your qualification for a HELOC. These include your home equity, your credit score, and how much debt you have. The eligibility criteria vary by lenders, but common requirements include: 

A Specific Equity Amount in Your Property

Equity is the remaining amount after dividing your home’s mortgage debt from its current value. At least 20% property equity is required to qualify for HELOC. There are still limitations to how much you can borrow, regardless of the size of your equity. Your limit is based on your loan-to-value ratio, calculated by dividing the home’s current value against the mortgage. Lending institutions also assess your combined loan-to-value, the property debt against its value. It shouldn’t exceed 80%. 

Good Credit

Your credit score can be used to gauge your risk level as an investment. You must have a decent score to qualify for a favorable interest rate. You can qualify for a HELOC on investment property with a minimum credit score of 720, but the FICO score impacts the charged interest rate. 

Income Documentation

You must prove to lenders that you can afford to repay the loan. Documentation demonstrates your income stability and employment information. Your paperwork must contain proof of long-term tenants if you’re borrowing against a rental property. You also need cash reserves covering at least six months. 

A Timely Payment History

Your payment history helps lenders determine the level of risk they are exposing themselves to when they give you a loan. Your loan repayment mannerisms are prioritized over other components of your credit score. Lenders conduct thorough assessments to determine your reliability to pay back the amount. 

Low Debt

You can apply for a HELOC while you have debts, but there are certain considerations. They determine your debt-income ratio to determine whether you can handle additional debts. Your debt-income ratio shows your monthly debt payments compared to your income. Your debt ratio must not exceed 50% to qualify. 

The RenoFi HELOC

If you’re considering taking out a HELOC on your investment property to fund a renovation loan, there may be a better alternative. A traditional HELOC option allows you to borrow up to 80-90% of the current value of the property. 

While this option may work for some, it often isn’t enough to fund a larger renovation project. RenoFi HELOC is an alternative in these situations because it leverages the after renovation value or the future value of the property and increases the borrowing power. 

For example, imagine that your property is currently valued at $500,000 and you have an outstanding balance of $400,000. You are planning a larger renovation project and expect that the after renovation value of the property will be $640,000. Your current loan-to-value ratio (LTV) is already at 80% which means that a traditional HELOC will not allow you to borrow anything. 

A RenoFi HELOC, however, recognizes that the project adds value to the property and thus allows you to go as high as 150% LTV using the current value of the property or 90% using the after renovation value of the property, whichever is the lower amount. So in this example, while using a traditional home equity loan results in your borrowing power effectively being $0, a RenoFi HELOC allows you to borrow up to $176,000 thanks to the after renovation value of the property!

If you’re considering a home renovation and need a HELOC that gives you greater borrowing power, exploring RenoFi’s options might be the perfect solution for you.

Get started with your RenoFi loan here

HELOCs on Investment Properties vs. Primary Residences

Fewer lenders provide HELOCS on investment properties than primary residents and secondary mortgages. The eligibility requirements are stricter, and the HELOCs bear higher interest rates.  

Most lenders require credit scores of over 700 for investment properties, but primary residences can secure a HELOC with scores from 650 to 680. The debt-to-income ratio and loan-to-value maximum acceptable rates are often lower for investment properties than primary residences. 

HELOC Lenders

Who offers HELOC on investment property? A RenoFi HELOC is available for investment properties through some of our lending partners. It provides you with the flexibility you need when you need it. 

Additionally, different financial institutions across the country also offer this. Each lender may slightly vary their repayment terms and loan costs. The typical financial institutions offering HELOCs include: 

Banks

A bank accepts client deposits and makes loans. It is regulated at the state and federal levels. Bank clients enjoy various services, including wealth management, insurance, and check-cashing. 

The Federal Deposit Insurance Corporation insures banks in the United States up to certain limits in case they fail. Banks keep money from their customers safe and lend it to other clients at an interest.  You can access banking services physically and online.

Types of Banks

Banks are categorized as retail, commercial, or investment banks. Every category operates independently. The bank types include:

• Retail Banks: They provide services to the general public, allowing them to access credit and deposit funds securely. Clients can access automobile finances, mortgage services, and short-term loans. Larger retail banks provide wealth management services and private banking to high-net-worth individuals. 
• Commercial Banks: A commercial bank provides commercial real estate, cash management, and employer services. It also offers consumer lending through credit cards, automobile lending, and residential mortgages. Mortgages are used to buy properties and have repayment periods of over 30 years. 
• Investment Banks: Investment banks provide corporate clients with complex services and financial transactions. They underwrite and assist with mergers and acquisitions. They also offer brokerage services and financial advice to clients like pension fund companies. 
• Central Banks: A central bank is privileged to handle a nation’s money production, distribution, and credit. It regulates member banks and formulates monetary policy. The institution sets up capital and reserve requirements to control bank lending capabilities. 

Credit Unions

A credit union is a financial cooperative aimed at providing banking services rather than maximizing profits. It is owned and controlled by the users of its services. To join a credit union, you must belong to a specific organization or group, live in a particular area, or work for a partner company. Some credit unions have lenient membership requirements, allowing members to join by opening a savings account and depositing some amount. 

Members’ deposits create a communal money pool that provides loans to other members. The credit union’s income through interest is reinvested into the organization or fund community projects. 

Loan Brokers

Loan brokers operate as middlemen between borrowers and mortgage lenders. They don’t use their money, but they compare different lenders and choose an offer that suits your needs best. Brokers work with different lenders and can access different types of mortgage loans. They can help assess your qualifications when taking out a loan.

Steps to Apply for HELOC

Applying for HELOC compares to applying for other mortgage loans. Compare rate quotes to pick a lender and submit your financial documents. Here’s how to get started:

1. Assess Your Finances. Property values are always on the rise. Before applying for a HELOC, you must estimate your equity. You need to understand your property value versus your mortgage balance. The difference between the property’s fair market value and mortgage balance equals your equity stake. 
2. Compare Rate Quotes. Compare the rate quotes from different financial institutions to get better deals on an investment property. Some lenders charge zero closing costs but higher interest rates, and vice versa. Determine the overall impact of the deals to pick the one that suits your needs. 
3. Complete Your Application. After choosing a lender, complete the full HELOC application. The underwriting process involves property appraisals and documentation of your finances. The lender also examines your cash flow, debt load, and reserves. These details determine the loan amount you qualify for and the interest charges. 
4. Wait for Approval. After your application, approval may take a few days. The lender’s schedule and how fast you respond to their questions or conditions impact the waiting duration. Appraisal adds time to the approval process, but it can work in your favor by acquiring a higher loan limit. 
5. Close on the Loan. Once the final approval is passed, you must pay the closing cost and sign the final documentation. Your credit line may be accessible in a few days. The waiting period is the rescission period, where you can walk away from the HELOC if you change your mind. 
6. Access Your Line of Credit. Once the process is complete, you can access your funds in various ways. Lenders choose their HELOC funding methods. Common ones include checkbooks, debit cards, and in-branch cash withdrawals. You may also use electronic transfers online or by phone.

Should You Get an Investment Property HELOC?

An investment property HELOC can help increase your rental income or boost your asset’s selling price. This can be accomplished when the funds are used to finance property improvements or make upgrades to the investment property. All of this ultimately increases its value, rental income potential, and even resale price.

Alternatively, you can tap into your built equity for other goals. Your decision depends on whether you’d like to cash out some of your equity or improve the return on your investment property. 

If you want to improve your investment property, you need to plan your project costs. Obtain multiple quotes for property remodeling or other activities to find the most favorable one. Assess the project’s impact on your property before making a final decision. 

Determine the potential increase in rental income or the sales price that the project will bring. Forecasting your return on investment on rental property improvement can help determine the break-even period and whether a HELOC is a viable option. 

Calculating the return on investment is best if you’d like to renovate and sell your property. Consulting a real estate agent or any other professional involved in investment properties can help determine the value of a home improvement project. They can also recommend projects for better returns.

HELOC Benefits and Risks

Your investment property is a valuable wealth source that you can tap. A HELOC is a good way of doing so. Borrowing against your investment property is beneficial, but it has its risks. 

Pros of a HELOC

A HELOC offers the following benefits:

• Lower Interest Rates: HELOC rates are lower than personal loan and credit card rates and may be more affordable for renovation financing and debt consolidation. 
• Flexibility: You can use HELOC funds any time you need them. You will make smaller repayments if you spend less cash than you anticipated. Some lenders, like RenoFi, offer an interest-only HELOC where you pay interest and no principal during the draw period. You can choose between fixed rate and variable rate HELOC options. 
• High Loan Limits: A HELOC gives you access to large amounts. The minimum credit line is $10,000. Many lenders offer credit lines of up to $500,000.
• Property Appreciation: HELOCS can help you build your business while leveraging existing equity. Investing in property improvements or additional property increases the value of your investment over time, increasing the potential for higher returns and property appreciation. 

Cons of a HELOC

A HELOC bears these risks:

• Your Investment Property is on the Line: Your real estate or rental property secures your HELOC loan. Defaulting on your monthly payments risks foreclosure. This can lead to the loss of monthly cash flow.
• Potential to Quickly Run Up Balance: The draw period allows you to make interest-only payments. The loan may begin to amortize and increase payments significantly. 
• Increased Debt Risk: Your debt load increases when you take out a HELOC on investment property. It becomes more difficult to get approved for other loans and mortgages. It also increases the risk of defaulting payments. 
• Drained Equity: Taking out a HELOC decreases the equity value of your property. Before taking a HELOC, your equity is valued as the total property cost minus the mortgage payment. The HELOC is provided against a fraction of the remaining value. The final property equity is the amount that remains after deducting the HELOC amount.
• Variable Interest Rates: HELOCs have long draw and repayment periods, which may be subject to market fluctuations. This makes it difficult to budget for changing payments during the period. 

Conclusion

A HELOC can be a good option if your property has substantial equity and you may need access to cash over time. If you’re looking to only pay for your borrowings at the current time, a HELOC is better than a lump-sum home equity loan. You must, however, be responsible because it gives you a sense of endless funds during the draw period.

RenoFi loans are the smartest way to finance a home renovation project. Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage and give up your low rate, RenoFi loans are based on the After Renovation Value of your home. This allows you to borrow on average 11x more, get a low monthly payment and keep your low rate on your first mortgage. 

Visit RenoFi today for more information on HELOC.