HELOC

What Is HELOC?

A HELOC (Home Equity Line of Credit) lets you tap your equity without refinancing. The lender gives you a credit limit—say $80,000 on a home worth $320,000 with a $200,000 mortgage. You draw $25,000 for a down payment on a rental. You pay interest only on that $25,000. Pay it back, and the $25,000 is available again. It's flexible: use it for rehabs, BRRRR down payments, or bridging gaps between deals. The catch: variable rates (your payment can rise), and it's secured by your property—default and you risk foreclosure. For investors with solid equity and a plan to repay, it's a powerful tool. For those who max it out and can't pay, it's dangerous.

A revolving credit line secured by your property's equity. You draw when you need it and pay interest only on what you've borrowed—like a credit card backed by your home.

At a Glance

What it is: Revolving credit secured by your property's equity—draw, repay, draw again.
Why it matters: Access equity without a refinance. Pay interest only on what you use.
Typical structure: Draw period (5–10 years) when you can borrow; repayment period (10–20 years) when you pay down the balance.
Rates: Usually variable—tied to prime. Your payment fluctuates when interest rates move.

How It Works

The lender appraises your property and calculates your equity—value minus existing liens. They'll cap your combined LTV (first mortgage + HELOC) at 80–90%. If your home's worth $300,000 and you owe $180,000, you've got $120,000 in equity. At 80% combined LTV, you could borrow up to $60,000 ($300,000 × 0.80 − $180,000).

Draw period. For 5–10 years, you can draw funds up to your limit. You pay interest only on the outstanding balance. Draw $30,000 for a rehab—you owe interest on $30,000. Pay back $15,000—you owe interest on $15,000. That $15,000 is available to draw again. It's a revolving line.

Repayment period. When the draw period ends, you can no longer borrow. You repay the remaining balance over 10–20 years. Payments typically include principal and interest—your monthly obligation jumps if you've drawn a lot. Plan for that. Some investors pay down the HELOC during the draw period to avoid a payment shock.

Rates. Most HELOCs are variable. Rate = prime + spread (e.g., prime + 1%). When the Fed moves interest rates, your rate moves. A 1% rate increase on a $50,000 balance adds roughly $42/month in interest. Not catastrophic—but it adds up across a portfolio.

Real-World Example

Phoenix house hack. You bought a duplex for $285,000 with an FHA loan. Two years later it's worth $340,000. You owe $265,000. Equity: $75,000.

You open a HELOC. Lender approves $50,000 (keeps combined LTV at 92%). You draw $35,000 for a down payment on a second rental—a 3-bed in Mesa. Mortgage on the new place: $140,000. Your HELOC covers the 20% down ($35,000) plus $2,000 in closing costs.

Monthly HELOC interest (at 8.5%): $35,000 × 0.085 ÷ 12 = $248. You're carrying two mortgages plus the HELOC. The new rental cash flows $320/month. Net after HELOC interest: $72. Tight—but you're in the deal. You pay down the HELOC from cash flow over 18 months. When it's zero, that $50,000 is available for the next deal.

Pros & Cons

Advantages

Access equity without refinancing—no new mortgage, no reset amortization.
Pay interest only on what you use—draw $20,000, pay on $20,000, not the full line.
Revolving—repay and reuse. Ideal for serial BRRRR investors who need short-term capital between deals.
Faster than a refinance—often funded in 2–4 weeks.
Can fund down payments, rehabs, or bridge gaps.

Drawbacks

Variable rates—when interest rates rise, your payment rises.
Secured by your home—default and you risk foreclosure.
Temptation to over-borrow—it's easy to draw more than you need.
Repayment period shock—if you've drawn heavily, payments jump when the draw period ends.

Watch Out

Execution risk: Don't max out the line. If the market dips or a tenant stops paying, you're carrying debt on a property that may have lost value. Lenders can freeze or reduce HELOC limits when property values fall—you might not have access when you need it most.
Modeling risk: Variable rates mean your payment isn't fixed. Model at 2% above today's rate. If you can't afford the payment at 10%, don't draw. And plan for the repayment period—if you've drawn $60,000 and the draw period ends in 3 years, you'll have a new principal-and-interest payment. Run that number before you borrow.
Exit risk: If you're using the HELOC to fund a BRRRR and the refinance falls through (low appraisal, lender issues), you're stuck carrying both the hard money and the HELOC. Have a backup plan—extra reserves or a longer HELOC draw period.

Ask an Investor

The Takeaway

A HELOC is a revolving credit line secured by your equity. Draw when you need it, pay interest only on what you use. It's flexible—ideal for down payments, rehabs, and BRRRR capital. But it's variable-rate and secured by your property. Don't max it out. Model at higher rates. And have a plan to repay before the draw period ends. Used wisely, it's a powerful tool. Used recklessly, it's a foreclosure risk.