Whenever I meet an aspiring investor, one of the very first steps is to see if we can unlock home equity to use to invest in real estate or other investments. Many of you may have heard of the term before (or it’s shorthand name HELOC) but may not understand all of the benefits or how the product works. I am going to explain how the approval process works, what the advantages are and how to best use the product to maximize interest and tax savings.
How does a HELOC work?
A Home Equity Line of Credit is a product that, if you work with the right lender, is “re-advanceable”. This means that you get approved for a global limit of up to 80% of the value of your home, and are able to break that amount into chunks as you see fit. One of the neat things about a HELOC is that as you pay down the principal on the mortgage portion(s), those funds become automatically accessible to be re-borrowed within another mortgage or line of credit portion inside the “global limit”. This can be extremely advantageous that I point out later of how people have been able to save money in tax but also simply have access to capital.
Most of our clients that take a HELOC are interested in having money available to them to do renovations, pay for future expenses, invest in real estate or other investments, or simply to have funds available “just in case” (especially for those of you who are self employed). The most common setup is 1 mortgage portion for the amount they currently owe, and a line of credit limit to fill the remainder of the available credit (up to 80% of the property value combined with the mortgage amount).