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A home equity line of credit, popularly known as a HELOC, is what people can use if they have already purchased a home and have some equity tied up in it. For example, if someone purchases a home for $100,000 with an $80,000 loan and has paid down the loan to $60,000—all while the house has appreciated to $120,000, then the owner can take out a HELOC to tap into the $60,000 of equity they have on the property ($120,000 value minus the $60,000 loan outstanding). They can then use this for a down payment.
Pros
– It’s a cheap financing option in terms of interest rates and closing costs.
– You can pay it off whenever you like. You pay on the outstanding balance, not the entire HELOC.
Cons:
– You are losing the equity in your original home and increasing the cost to retain it.
– Most HELOCs have adjustable rates. This does not allow you to easily predict your financing costs.
Strategy
A HELOC is a great way to jump start your real estate investing if you’ve already purchased a house and have significant equity in it. This is a great financing option for almost any strategy. You can use it as a down payment for buy and holds, for rehab costs on a fix and flip, or a combination of the two.