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Investment properties are a great way to make your money work for you. And if you have enough equity in your home, you might want to consider taking out a home equity line of credit (HELOC) on an investment property.

While it’s possible to get a HELOC on an investment property, it’s not quite the same as getting a HELOC on your primary residence. Here’s how you can use a HELOC for investment property and what you need to qualify.

How to Get a HELOC for an Investment Property

A HELOC is a revolving line of credit that you can use whenever you need it to make home-related purchases or improvements. However, HELOCs are not as common on investment properties, so few lenders offer this product. But for those who do, credit requirements may be higher than your primary residence, with investment properties requiring at least a good or excellent credit rating.

Other potential requirements include:

  • A loan-to-value (LTV) ratio of up to 80%
  • A few months of cash reserves in your bank account
  • Proven tenant income (if used as rental property)

Since every lender is different, you’ll want to ask your potential lender about their debt-to-income ratio (DTI) requirements, appraisals, and how much equity you need in your investment property.

Lenders that offer a HELOC on an investment property

Although not all lenders offer HELOCs on investment properties, some do. Here’s where to look:

  • Traditional banks
  • Local banks and credit unions
  • Loan brokers
  • Online lenders

Is using a HELOC for investment property tax deductible?

It depends on what you are using this HELOC for. If you take out a HELOC on your investment property and use those funds for home-related expenses, you can deduct those expenses from your taxes. But if you used a HELOC for other expenses, like debt consolidation or tuition, it can’t be deducted from your taxes.

Alternatives to Using a HELOC for an Investment Property

If you don’t qualify for a HELOC on your investment property or can’t find a lender for your needs, you have other options when it comes to tapping into your home’s equity.

Home Equity Loan

A home equity loan (HEL) is similar to a HELOC, but instead of a revolving line of credit, you’ll get your money in one lump sum. If you know how much you need to borrow and can get it all at once, this might be the right option for you. But like HELOCs, HELs may not be as widely available as some other options.

Refinancing by collection

A cash-out refinance replaces your current mortgage with a new one, but you cash out the equity you’ve earned. Typically, you’ll need to have around 20% equity in the home to refinance, although this figure may vary depending on the lender.

Since this is a new loan, your terms and interest rate will change. For example, you can lengthen the term of the loan to reduce monthly payments or shorten it to pay off the loan sooner. Don’t forget closing costs, which can cost you between 2% and 5% of the new loan amount.

If you can get a lower interest rate than you currently have, a cash refinance for your investment property might be worth it. But if you don’t have enough equity in your home, can’t afford closing costs, or don’t have strong credit to qualify, a cash refinance might not be worth it. sadness.

Personal loan

A personal loan can be used for almost anything. Most personal loans are also unsecured, meaning you don’t need to post collateral to get a loan. This is interesting for borrowers who fear losing their investment property in the event of late payment.

Since there is no collateral to secure the loan, lenders only use your credit history to determine your creditworthiness. So, personal loans tend to have higher interest rates than HELs, HELOCs, and cash refinances.

Loan terms can also be shorter compared to other options. HELOCs and HELs can go up to 30 years, like mortgages. Most personal loan terms, however, range from one to five years, but this duration varies a lot depending on the lender.

Find the best home equity lenders of 2022

Conclusion

If you are considering getting a HELOC for your investment property, you may qualify with a few select lenders. But with stringent requirements for credit scores, DTIs, and large cash reserves, you might want to consider alternatives.

If you’re still having trouble qualifying for a loan or other borrowing options, take the time to improve your credit score, pay off outstanding debt, or increase your cash reserves. It may take some extra work, but you can get a HELOC — or another type of loan — to fund your investment property.

Find the best home equity lenders of 2022