Mortgage Blog

Using A HELOC To Fix And Flip Another Property

May 17, 2022 | Posted by: Ronice Harrison

A home equity line of credit (HELOC) is a line of credit you get based on the equity you've built in your home. Your home becomes the collateral for any outstanding balance.

There's one key component that makes it particularly attractive for use in a fix and flip or another investment opportunity. Unlike conventional loans, a HELOC gives you much more freedom in how you spend the money.

The line of credit isn't paid out as a lump sum. Instead, it acts almost like a credit card. You use it when you need it.

How A Home Equity Line Of Credit Works For Property Investors


A lender approves a maximum limit and sets a timespan for how long you can make withdrawals. The limit varies based on your equity, which is the market value of your home minus the principal you still owe. Typically, an inspection is sent to verify the value of the home and there's a limit, based on a percentage of the equity.
Generally, up to 80 percent of the equity is approved for the HELOC. However, sometimes lenders will offer a HELOC up to 100 percent of the home's appraised value.

How You Get Money For Your Fix And Flip Project


You withdraw money from the HELOC using a card or checkbook, almost like a regular checking account. Unless you have enough equity in your home to pay cash for a property you plan to flip, the first withdrawal is typically for the down payment on the investment property.

As you pay off the money that you borrow, it frees up more money that you can borrow and repay on an ongoing basis, up to the limit set on your HELOC.

This system works beautifully for investors who want to fix and flip projects. It lets you pay down the balance right away as you prefer. You can also withdraw more money when you need it with no hassles.

There Are Restrictions To Be Aware Of


A HELOC is only available in an owner-occupied primary residence. This means that you can't borrow the equity on an investment property in the same way. The good news is that there are no restrictions on what you do with the cash - although using it for everyday expenses or luxury items is probably a bad idea.

But Are There Any Risks Using A HELOC For Fix And Flip Property Investing?


Despite the freedom offered by a HELOC, it's important to remember that the money you spend on fixing and flipping an investment property uses your home as collateral. If you fall behind on a credit card, the bank won't be able to foreclose on your home - but a HELOC lender can and will do so.

What if a HELOC is not for you?


If a HELOC is not for you, then consider taking out a first, or a second, mortgage if one is available to you. They are great for longer-term investments and have lower interest than a HELOC.

If you’re ready to learn how much you can borrow, and at what monthly payment, AQRE Lending can help connect you with a mortgage lender that best meets your needs!

Fill out our quick application form to get started.

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Sources

https://www.biggerpockets.com/forums/50/topics/55981-finance-a-house-flip-with-1-heloc
https://fitsmallbusiness.com/fix-and-flip-loans/#HomeEquityLineofCredit
https://smartasset.com/mortgage/whats-the-best-way-to-finance-a-house-flip

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