Best HELOC Lenders for an Investment Property | March 2023
The equity built up in your investment property is an important asset that doesn't have to just sit there gathering dust. Instead, it can be leveraged through a home equity line of credit (HELOC) to maximize your investment. Learn more right now about the best HELOC lenders for your investment property.
You probably already know that you can take out a home equity line of credit on your primary residence. However, you may not realize that a HELOC on an investment property is also a great way to maximize that unused pile of cash.
Perhaps you want to make some home improvements on your rental property to optimize its earning potential, have a big purchase in mind, or other investments you want to make.
The thing is, investment property HELOCs can be a little tougher to find, and gain approval for, than a HELOC on your primary residence. That being said, it is possible. Lenders who offer HELOCs on investment properties generally have more stringent approval requirements, higher interest rates, and stricter loan terms.
Here is SuperMoney's list of the best HELOC lenders for an investment property.
How HELOCs work
Unlike a home equity loan, where you receive a lump sum of cash all at once, a home equity line of credit is an alternative way to make use of the equity in your investment property. It works like a credit card, where you have a revolving line of credit that you can access at any time for as little or as much as you want (up to your credit limit).
The amount of time where you can access the cash is known as the draw period. This time period is typically ten years, although this can vary depending on your lender and the amount you were allowed to borrow.
During the draw period, you're usually allowed to make interest-only payments. However, HELOCs usually come with variable interest rates, which can make your monthly payment unpredictable. Once you enter the repayment period — which is usually a term of 20 years, give or take — you must start paying off the principal plus interest.
Lenders who offer HELOCs will usually only allow you to borrow 80% to 85% of your home's equity, although that can vary up or down. Many mortgage professionals, however, recommend leaving at least 20% of the equity in the house after accounting for your home equity line of credit.
HELOCs on rental properties vs. HELOCs on family homes
As mentioned earlier, getting a home equity line of credit on investment properties is a bit more difficult than getting one on your primary residence, and there are a number of reasons for this.
One of the biggest reasons for this is simply that people are more likely to default on a loan for an investment property than they are with a mortgage on an owner-occupied property. Therefore, regardless of your credit history or ability to pay, lenders will naturally perceive an investment property HELOC as significantly riskier.
Since approving a HELOC on an investment property is riskier, lenders who offer HELOCs will charge you more. You're juggling multiple loans on multiple properties, so you'll likely get hit with higher interest rates and fees. Unfortunately, this makes the loan more costly overall.
Harder to find lenders
Another snag you might find when trying to get a HELOC on an investment property is finding a lender who offers HELOCs. They're not as ubiquitous as traditional HELOC lenders, but they are out there and SuperMoney can help you find the one that best fits your needs.
Tough to qualify
Furthermore, finding a lender who is willing to take a risk on your application for a credit line can be tricky as well. It will certainly help your case if you use the money to improve your rental property, but you'll need to jump through a few more hoops than that.
For one thing, minimum credit score requirements will be more strict. For example, many borrowers can get a HELOC on their primary residence with a credit score as low as 620. A HELOC on an investment property, on the other hand, will likely require a minimum credit score of 720 to 740, and possibly more depending on your other qualifications.
Additionally, an investment property HELOC may require multiple appraisals to verify the value of the home, whereas an owner-occupied home may not require anything so formal. And finally, the borrower will need to show significant cash reserves (a bare minimum of six months), a low debt-to-income ratio (40% or less), and a low loan-to-value ratio of no more than 80%.
Advantages and disadvantages of a HELOC on an investment property
Don't necessarily let the more stringent requirements for a HELOC on an investment property scare you off. If you think you can meet the lender's conditions, there are very some good reasons to pursue a HELOC for your rental property.
That being said, you'll face risks anytime you take out a new loan. When you're borrowing against the equity in an investment property, it is going to cost you more, so it's worth taking the time to consider the drawbacks.
Here is a list of the benefits and drawbacks to consider.
- It's just sitting there. The ability to use the home equity for more useful purposes is a big plus. After all, it's money you've already put into your investment property. You could use it for a down payment on another rental property, to fix up the existing place, or for any number of other uses.
- Home improvements. Anything you do to enhance or improve the property will only increase the market value of the home. This can be useful in the short term to justify higher rents and in the long term when you're ready to sell.
- No urgent need to spend. Unlike home equity loans, which you start paying off right away, your HELOC doesn't necessarily have to be used immediately, or even all at once. If you don't have imminent plans for it, it's okay to let it sit there for a while. Be aware that some lenders may charge an inactivity fee after a period of time, but it can be really handy to have that ready cash available should an investment opportunity present itself.
- Rental property as collateral. This is probably the biggest disadvantage to a HELOC on an investment property. If you default on the loan, you could lose the property altogether. Also, depending on your contract, if you are late or miss a payment, fees and interest rate increases could effectively drive you toward foreclosure as well. On the other hand, this is why lenders require you to have cash reserves — to avoid exactly those types of scenarios.
- Higher interest rates. As discussed, HELOCs normally come with variable interest rates. A HELOC on an investment property is going to start you out at even higher rates than on an owner-occupied property. If you plan on carrying a balance for some time, it's not a bad idea to talk to multiple lenders to find the best rate possible and try to at least calculate what your minimum payments would be. It's important to be prepared to manage the new debt.
Alternatives to HELOCS on rental properties
If a HELOC on an investment property sounds like too much of a risk at the moment, consider some alternative solutions.
HELOC on your primary residence
As stated, it's more difficult to get a HELOC on an investment property, so how about a home equity line of credit on your primary residence? This is certainly worth considering if: a) you haven't already made use of the home equity where you live, and b) you realize your chances are slim to gain loan approval for a HELOC on your rental property.
Shared equity agreement
If a HELOC doesn't work out for you, your next best consideration might be to look into getting a shared equity agreement. This is where an investor essentially pays you a lump sum of cash for a portion of the future equity in your home. Because it's not really a loan, income and credit score requirements are much more forgiving, increasing your chances of approval.
Yes, you're giving up some equity in your home, but there are no monthly payments to worry about. In addition to that, the money doesn't have to be paid back until the term is up (usually 10 to 30 years) or you sell the house. You can also buy out the contract at any time. As an investor already, you could probably put that money to a much better use right now.
Home equity loan on your rental property
Another way to access the equity in your investment property is to get a home equity loan instead of a HELOC. This could be a good choice for investors with a solid purchase in mind, such as a down payment on another investment property.
Keep in mind, that home equity loans do count as a second mortgage, which means that your rental property is at risk of foreclosure if you can't make your payments. Unlike a HELOC, you'll also have to start paying it back right away. However, home equity loans come with fixed interest rates, which can be an advantage over the variable interest rates of HELOCs, and lenders will sometimes waive the closing costs.
If you're not comfortable with juggling an extra monthly payment like you would with a HELOC or home equity loan, a cash-out refinance might be more up your alley. This type of mortgage refinancing lets you tap your home equity by swapping out your existing loan, paying off your current mortgage balance with a bigger mortgage, and paying you the difference in equity in cash.
A cash-out refinance is not without its drawbacks, though. It's a bigger loan, which means it may come with a higher interest rate, and your monthly payments will most likely increase as well. (Of course, that depends on whether or not you can get more competitive interest rates than with your previous mortgage.) Plus, because it's a new mortgage, most lenders require you to pay an origination fee and other closing costs.
Unsecured personal loan
One of the greatest advantages of unsecured personal loans over tapping your home equity is the fact that your house won't be used as collateral. That means, if for some reason you can't repay the loan, you are never in danger of losing your home or your investment properties.
Personal loans will usually come with higher interest rates, and you may not be eligible to borrow as much as you would with a home equity loan. But, if you have a solid income and good to excellent credit history, you might be able to gain loan approval for a personal loan if your home equity options don't pan out.
Are there tax benefits to using a HELOC on a rental property?
If you use the money from a HELOC or a home equity loan to make improvements to investment properties, the interest you pay on those loans is tax deductible. However, you can't use that money for auto loans, to consolidate debt or to pay college tuition, for example. Only the funds that are directly used to improve the house are eligible for tax benefits
How can I find a lender willing to offer HELOCs on investment properties?
Many financial institutions no longer offer HELOCs on investment properties, but there are still ways to make it happen. Start by talking to your own bank or credit union. You may have a better chance at an institution where you already have a solid relationship — if they even offer HELOCs for rental properties. If they don't however, as a trusted financial advisor, they might be able to point you in the right direction.
Other options are to talk to smaller banks and credit unions who might be more willing to take a chance on your line of credit. You could also look to other real estate investors or forums for investors that might have contacts you could take advantage of.
How much equity do you need in your investment property to qualify for a HELOC?
Generally speaking, most lenders willing to let borrowers take out HELOCs on non owner-occupied properties require at least 15% to 20% of equity in the home, not counting your credit line. That means you will need considerably more than that depending on how much money you want to borrow.
For example, if your existing mortgage was for $200,000, you would need to have at least $40,000 (or 20%) in home equity to even be considered for the loan. But you're going to have much better chances of loan approval if, say, you had $100,000 in equity and only wanted to borrow $50,000 or $60,000. That would leave you a comfortable cushion of equity in the rental property, and you'd also avoid having to pay private mortgage insurance (PMI).
- 1st Constitution Bank HELOC
- Banner Bank HELOC
- Brotherhood Credit Union HELOC
- Figure's Home Equity Line
- FirstBank Home Equity Line of Credit
- Members 1st Credit Union Heloc (Fixed Rate)
- Members 1st Credit Union Heloc (Variable)
- MembersFirst Credit Union Home Equity Line of Credit
- PNC Home Equity Line of Credit
- Redwood Capital Bank Home Equity Lines
- Truist Bank HELOC
- US Bank HELOC