Home equity line of credit

[Robert Juanes]

Want to start buying property and I have some equity in my current home. I want to know exactly how a home equity line of credit work. Does the credit get tacked on to the existing loan? I just owe more on my house? or is it a separate payment,do my payments go up on my existing mortgage ? If anyone knows how it all works please advise me in the subject. Any information is greatly appreciated. 

[Kyle J.]

A HELOC is a line of credit secured by your property. It's based, in part, on the available equity in the property. But not solely. Lenders will also take into account your income, credit history, DTI ratio, etc. Each lender will have their own criteria.

A HELOC can be a good way start investing. You just want to make sure you're not overextending yourself and can cover the payments if you make a draw so you don't put your home at risk.

If you plan to use a HELOC to fund the down payment on another property, there's a couple things to consider. First, you'll end up having a higher DTI ratio that the first mortgage lender on the property you're buying will have to take into account when qualifying you for the new mortgage. So make sure they know up front that the funds for the down payment will be coming from a HELOC so they can factor that in. You don't want to find out towards the end of the process that using the HELOC to fund the down payment is going to push your DTI ratio over their limit.

Secondly, most lenders that do HELOCs have certain criteria that they do NOT allow the HELOC funds to be used for. For instance, I once had a lender tell me that they don't allow the funds to be used for "new property purchases". Other lenders have no problem with it. Point is, you'll want to ask them up front if there is anything that they don't allow the HELOC to be used for so you don't waste your time applying with a lender that isn't going to let you do what you want with it.