Can you get a HELOC for a rental property?

The pros and cons of using a HELOC to buy a vacation rental property


Whether you dream of buying a vacation home to rent out to paying guests or an investment property you can eventually retire in, there are many financing options to make it happen. One possibility: Tapping into the equity of your current primary home.

Taking out a Home Equity Line of Credit (HELOC) could minimize the immediate out-of-pocket expenses you’ll face when buying an investment property. Before you do, it’s smart to consider the pros and cons, as well as alternative options. Let’s explore.

What is a HELOC?

A HELOC is a revolving line of credit that allows you to borrow money against the equity in your primary home. Generally speaking, a HELOC works like a credit card. You have a maximum amount that you can borrow. You spend, repay, and repeat. And, only pay interest for the amount of credit you actually use. The funds can be used for almost anything, including a downpayment for a vacation home, paying closing costs, or even purchasing a second home in full.

Here are some key details:

  • HELOCs have two time periods:
    • The draw period: You’ll typically have 10 years to use the funds from the HELOC and pay only interest back.
    • The repayment period: After the draw period, you’ll typically have 20 years to pay back the principal and the interest.
  • To qualify for a HELOC, lenders typically require:
    • A credit score over 620
    • A debt-to-income ratio below 40%
    • Equity of at least 15%
  • Most lenders will let you access 80-90% of the value of your primary home (minus what you still owe)

The pros & cons of HELOCs

A contemporary bathroom at a vacation rental in Tacoma, WA.
Pros of a HELOC

There are a number of advantages to using a HELOC to finance a vacation rental property, including:

  • Flexibility: With a HELOC, you have access to a revolving line of credit, which means you can borrow and repay funds as needed. This can be particularly useful for financing a vacation home or other investment property, as you can continue to access this credit to make renovations or repairs.
  • Low interest rates: HELOCs typically come with lower interest rates than other types of loans, such as personal loans or credit cards. This can save you money in interest charges over time.
  • Initial interest-only payments: The typical draw period for a HELOC is 10 years, when you only have to repay the interest (though you can pay back the principal too).

The kitchen of a vacation home in Tacoma, WA with modern design.
Cons of a HELOC

HELOCs also come with some potential drawbacks, including the following examples below:

  • Variable interest rates: Unlike fixed-rate loans, your HELOC interest rate can increase as the prime rate changes. This could mean low monthly payments at first, then possibly higher payments later on.
  • Risk of foreclosure: Since a HELOC is secured by the equity of your primary home, there is a risk of foreclosure if you’re unable to make your payments or don’t get as many bookings as you anticipated. This can put your primary home at risk, which is a significant downside.
  • Extra debt: Taking out a HELOC increases your debt load, impacting your credit score.

Other vacation rental financing options

Taking out a HELOC for investment properties is useful, but it’s not ideal for every homeowner. Here are some financing alternatives to consider in place of a HELOC. Work with a financial advisor to guide you on the best financing option.

  • Cash-out refinance: Replacing your current mortgage with a new loan with a higher balance allows you to convert some of your home equity into cash. In many cases, you can borrow up to 80% of your home’s value.
  • Investment property loan: Meant for income-producing properties, these loans typically require high credit scores, a low debt-to-income ratio, and enough cash reserves to cover 2-6 months of mortgage payments for both your primary and vacation rental property.
  • Conventional loan: In most cases, your second home must be 50 or more miles away from your primary residence. Otherwise, it will be classified as an investment property and not eligible for a conventional loan.

Ready for the next steps? Try our handy guide on how to buy a vacation home. You can read up on the vacation home buying process from searching to closing, and the key steps in between.

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Disclaimer: This publication is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual's legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this reason, you are advised to consult with your own attorney, CPA, and/or other advisor regarding your specific situation. The information provided here is for your use and convenience only. We have taken reasonable precautions in the preparation of this material and believe that the information presented in this material is accurate as of the date it was written. However, we will assume no responsibility for any errors or omissions. We specifically disclaim any liability resulting from the use or application of the information contained in this publication.

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