Why HELOCs Are Harder to Get on Investment Properties, and What to Know If You’re Considering It

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HELOCs are hot right now.

Why? The median U.S. home listing price was $435,000 in August 2022, according to the latest data from Realtor.com. This 14.3% year-over-year increase in home prices across the country, spurred by low supply and high demand in the housing market, means many homeowners have gained substantial amounts of equity they can now borrow against for quick cash through a home equity line of credit (HELOC)

If you own an investment property and want to tap into funds for a home improvement project, to consolidate debt, or to purchase another property, you may be considering getting a HELOC on your investment property instead of putting your own house up as collateral.

While HELOCs on investment properties are available, they tend to be more expensive and are harder to get than if you were getting one on your primary residence. Before you decide whether getting a HELOC on your investment property is the right financial move for you, you’ll want to know the requirements to get one, the pros and cons, and how it stacks up against other financing options

Can You Get a HELOC on an Investment or Rental Property?

While it is possible to get a HELOC on an investment or rental property, it’s more difficult to find and get approved for one. That’s because lenders usually see them as bearing higher risks than if you were getting one on your primary residence. There’s an assumption that there’s less incentive for you to stay on top of your payments because you don’t live in that home.

“With an owner-occupied property, the bank is assuming [that since] you live there, you’re going to make sure you pay for it so you don’t lose the house,” says Monick Halm, an investment property expert and founder of Real Estate Investor Goddesses. “They don’t feel that with a non-owner occupied [property] that there’s the same incentive.”  

Not all lenders offer HELOCs for investment properties, says Mike Carpenter, a mortgage originator based in Kirkland, WA, and founder of Mike the Money Man. Even if your financial profile would qualify you for a HELOC on your investment property, you may still find your options limited simply because fewer lenders offer this type of product. 

Requirements to Get a HELOC on an Investment property

The requirements to get a HELOC of any kind — whether on an investment property or principal residence — vary by lender, but there are some common factors lenders look for when evaluating an application:

  • Home equity and loan-to-value ratio: your home equity represents how much of your home you actually own. Loan-to-value ratio (LTV) is one way to measure your home equity, and is calculated by dividing your current mortgage balance by the appraised value of your home. HELOC lenders typically allow a maximum LTV of 80% to 90%, meaning you’ll need to have at least 10% to 20% equity in your home.
  • Debt-to-income ratio (DTI): your debt-to-income ratio is calculated by dividing your total monthly debt obligations by your monthly gross income. The lower your DTI, the better you’ll look to lenders, since it shows that you’re less likely to overextend yourself if you take on new debt. 
  • Credit score: Your credit score is calculated based on information in your credit report and helps a lender determine how likely you are to repay your debts — and how risky it is to lend you money. The higher your credit score, the more likely you’ll qualify for a HELOC, and the lower the rate you’ll likely get.
  • Cash reserves: Some lenders may require you to have a certain amount of cash in reserves before they’ll grant you a HELOC. This is to ensure you have adequate funds to cover any unexpected expenses and won’t immediately default on your loan if you have an emergency.

Typically, lenders will have more stringent requirements on all of these factors if you’re taking out a HELOC on an investment property instead of a principal residence. To get approved for a HELOC on an investment property, you may need to have a lower loan-to-value ratio (meaning more equity in your home), lower debt-to-income ratio, higher credit score, and more cash reserves. The exact thresholds required will vary by lender, and it may be difficult to find out that information until you apply.

Lenders might also look to see if you have a long-term tenant on your investment property, explains Halm. “They generally want to see a long-term lease versus a short-term one, and then they want [the property] to be occupied,” she says. “They’ll also want to see proof of income.”

The lender will also want information about your other properties, says Halm. “They want to make sure you’re not using [the HELOC] to pay debt down on other mortgages you owe,” she says. 

HELOC Rates Are on the Rise

The Fed on Wednesday announced it will raise its benchmark short-term interest rate – the federal funds rate – by 75 basis points as part of its ongoing bid to rein in persistently high inflation. Prices were 8.3% higher in August than they were a year earlier, according to the Bureau of Labor Statistics, which was higher than expected. 

A higher federal funds rate will mean higher interest rates for all types of loans, and it will have a particularly direct impact on HELOCs and other products with variable rates that move in concert with the central bank’s changes. 

“Any way you cut it, it’s not going to be fun to have a higher payment every month on the same amount of money,” Isabel Barrow, director of financial planning at Edelman Financial Engines, told us

Shop around with different lenders and find a payment you can afford. “HELOC rates in particular will be at the mercy of how much more the Fed ends up needing to raise interest rates before inflation has been tamed,” says Greg McBride, CFA, chief financial analyst at Bankrate, which like NextAdvisor is owned by Red Ventures.

Advantages and Disadvantages of a HELOC on an Investment Property

Pros

  • Less risk to your primary residence: All HELOCs are secured by a property, meaning that you’ll lose the property if you default on the loan. If you get a HELOC on your investment property instead of your primary residence, you won’t lose your own home if you default on the loan — although you could still lose the rental property and face other serious consequences.

  • Flexible line of credit: A HELOC offers you a flexible line of credit that you can continuously draw upon (up to the credit limit) for a long period of time, usually 10 years or more. This can make it good for ongoing expenses or projects where you don’t know the total cost at the onset. And, since you only pay interest on the amount you withdraw, you can have access to a large pool of potential funding without paying for extra money you don’t use.

Cons

  • Potentially higher interest rate: HELOCs on investment properties are considered riskier for the lender, says Carpenter. Because of this, they typically come with higher interest rates than HELOCs on primary residences, even if the borrower’s financial profile is the same in both cases.

  • Potentially more fees: HELOCs typically come with fees and closing costs that could add to the cost of your loan. While some lenders may waive these costs for a HELOC on a primary residence, says Halm, they generally won’t waive them for a HELOC on an investment property.

  • Harder to find: There are fewer lenders who offer HELOCs on investment properties compared to lenders who offer HELOCs on primary residences. Because of this, it may be harder to find a lender, and you’ll have fewer options to choose from when shopping around to get the best rate.

Is It a Good Idea to Get a HELOC for My Investment Property?

Whether it’s a good idea to get a HELOC for your investment property depends on your individual circumstances, financial goals, and intended use for the HELOC

A HELOC in general could be a good fit if you want a flexible, ongoing source of financing that you can tap into for virtually any purpose. However, make sure you’re comfortable with the variable-rate structure of a HELOC, which can cause your rate — and monthly payment — to unexpectedly change in the future. 

Pro Tip

HELOCs typically have a variable interest rate structure, meaning the interest rate could change at any time during the life of the HELOC. Some lenders offer a rate-lock option that lets you lock in a fixed interest rate, but that may come with additional fees or a higher starting interest rate.

One benefit of a HELOC is that you only need to pay interest on the balance you withdraw, not the amount of your entire credit line. “It’s a line of credit that you can tap into, or not tap into, as needed,” says Halm. “But if you’re not tapping into it, you’re not paying for it.”

Compared to a HELOC on a primary residence, a HELOC on an investment property will typically be both harder to get and more expensive. But, sometimes you may not feel comfortable putting your own house up as collateral, or you may be unable to get a HELOC on your primary residence — for example, if the loan-to-value ratio on your primary residence is too high. In that case, getting a HELOC on your investment property can be a viable alternative. 

Experts don’t recommend using a HELOC — or any type of debt — to finance an unsustainable lifestyle, but a HELOC can be a good strategy if you use the money wisely. For example, you can use a HELOC to pay for renovations on your property to increase its value, or use it for a down payment on another rental property, says Halm. In both those cases, the money spent could be considered an investment that will pay off in the future, and a HELOC can be an affordable and accessible way to access the funding you need. 

Alternatives to a HELOC for Your Investment Property

If you want to tap into your home equity or you need fast funding, here are some alternatives to getting a HELOC on your investment property:

  • A HELOC on your primary residence: HELOCs on an investment property are considered riskier for the lender because the borrower has less incentive to keep up with payments, since their own home isn’t at risk. Because of this, lenders typically set stricter borrower requirements and charge higher interest rates. HELOCs on a primary residence don’t have this issue, which is why they might be easier to qualify for and offer lower interest rates. 
  • A home equity loan: a home equity loan works similarly to a HELOC, letting you borrow against your home equity. Home equity loans are fixed-rate installment loans with the full loan amount paid in a lump sum when you take out the loan, instead of the revolving credit line structure of HELOCs. Like with HELOCs, home equity loans on investment properties are possible, but you may be faced with fewer options, stricter borrower requirements, and higher interest rates.
  • A cash-out refinance: Unlike a HELOC or home equity loan, which acts as a separate loan on top of a primary mortgage, a cash-out refinance replaces your existing mortgage with another one in a larger amount. Then the difference is then doled out to you as cash. You can get a cash-out refinance on both investment properties and primary residences, but just like with a HELOC or home equity loan, a cash-out refinance on an investment property will typically come with stricter borrower requirements and higher interest rates.
  • A personal loan: If you need cash, you can also take out a personal loan from a bank or online lending company, suggests Carpenter. Personal loans are generally unsecured, meaning they don’t require your home as collateral like a HELOC or cash-out refinance. However, this means they’ll typically have a higher interest rate than HELOCs.

Best HELOC Lenders for Investment Properties

Fifth Third Bank

Fifth Third Bank offers HELOCs with line amounts ranging from $10,000 to $500,000. There are no closing costs, but there is an option to lock in a fixed interest rate on your HELOC for a $95 fee. HELOCs from Fifth Third Bank come with a draw period of 10 years with interest-only payments, followed by a 20-year repayment period. Fifth Third Bank offers HELOCs on condos, multi-unit, and non-owner occupied properties, but 0.25% will be added to your interest rate for each applicable factor. There may be additional benefits for customers with a Fifth Third Preferred Checking Account.

PenFed Credit Union

PenFed Credit Union offers HELOCs on non-owner occupied properties for line amounts ranging from $25,000 to $500,000. The maximum combined loan-to-value ratio (CTLV) is 80%, meaning that the total value of all loans secured by the property (including HELOCs, home equity loans, and primary mortgages) cannot exceed 80% of the property’s value. Borrowers have a 10-year draw period, and the repayment period is 20 years. PenFed HELOCs feature the option to switch from a variable to a fixed interest rate. 

TD Bank

TD Bank offers HELOCs on investment properties with a credit line between $25,000 and $500,000. Customers with a TD Bank personal checking account are eligible for an interest rate discount of 0.25%. There is an origination fee of $99, an annual fee of $50 after the one-year anniversary, and an early termination fee of 2% of outstanding principal balance ($450 max) if the line of credit is paid off and closed within 24 months of account opening. There may be additional closing costs on lines of credit greater than $500,000, investment properties, and co-ops.

Frequently Asked Questions (FAQ):

Can I use a HELOC on a rental property?

Using a HELOC on a rental property is possible, but riskier for the lender, so expect stricter lender requirements, higher interest rates, and less lenders in the market for  rental property purposes. 

Can I get a HELOC for a second home?

Yes, HELOCs are possible for second homes, rentals, or any other property you own. However, HELOCs are more difficult to qualify for and more expensive for when used on non-primary residences.