Risks And Advantages of Home Equity Loans For Flippers
Current homeowners who want to leverage their existing property into extra income can use a home equity line of credit (HELOC) to finance their real estate ventures. These loans allow you to use the accrued cash value of your property as collateral for a new loan. For flippers, those who buy distressed properties, rehabilitate them, then sell them for a profit, this can be an effective strategy. However, flippers should exercise some caution when using these loans to purchase short-term investment properties. What is a HELOC? How can they help new investors build their net worth? What are some of the potential problems associated with HELOCs?
What Is A HELOC?
The difference between your home’s value and the remaining amount on your mortgage is called equity. HELOCs are loans for up to 85% of your home’s accrued equity. If your home is worth $300,000 and you still owe $100,000, your good credit could qualify you for a loan of up to $170,000.
While there are no restrictions on what you can do with the funds, there are some important features of HELOCs that make them different from other types of loans.
Rather than cash, successful loan applicants are issued a line of credit from the bank. Recipients can transfer balances to checking, savings, or other loan accounts.
Only owner-occupied homes qualify for HELOCs. Rental, vacation, and investment properties are excluded.
With a HELOC, you don’t pay interest until you actually use a portion of the funds.
Traditionally, homeowners have used HELOCs to finance repairs or renovations. However, savvy investors can use these funds to realize great profits in the real estate market.
How HELOCs Help Real Estate Investors Thrive
HELOCs are a useful tool for homeowners who want to break into short-term real estate investments.
Use your home equity instead of breaking into savings and retirement accounts to fund your business venture.
If you haven’t actually located your first property yet, HELOCs allow you to secure funding before committing to a purchase. Since you don’t pay any interest until the funds are used, you can take your time and find the perfect fit for your project.
For those who need more cash than their HELOC allows, your line of credit can be used to qualify for a hard money loan with a higher limit.
With the right knowledge, HELOCs can make your dream of flipping houses for a profit into a reality.
Potential Pitfalls Of HELOCs
When used incorrectly, HELOCs can cause financial havoc in the lives of investors.
HELOCs are essentially a second mortgage. That means if your venture fails, you risk losing your primary home if you can’t pay up.
Most HELOCs require at least 30% existing equity. It may be difficult to qualify if you’ve recently purchased your home.
If your primary residence needs large-scale repairs while your project is still active, you won’t be able to use your equity to fund the rebuilding effort.
These drawbacks, however, don’t have to deter your plans. Simply ensure that your insurance policies and savings are strong enough to survive emergency situations before you apply for a HELOC.
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