What are the restrictions on taking a HELOC from a primary residence vs taking a HELOC from an investment property?
I heard that HELOCS from a primary residence is usually used for remodeling and cannot be used for investing in another property. I am trying to verify that statement but can't find the answer. The idea is to take out a HELOC to outright buy an investment property in cash. Does it matter if you take the HELOC from primary residence or from investment property? Will one have lower interest rate or favorable rules vs the other?
I read this article and it says that HELOCs from investment properties are harder to get but HELOCS don’t have restrictions on how they can be spent.
There are no standard rules for HELOCs. Since HELOCs are just products of the individual lenders that offer them, each lender can make up their own rules. This is true whether the HELOC is on your primary residence or a rental.
I have a couple HELOCs on rental properties, and when I was initially calling around to find lenders that would do them, I had lenders tell me they didn’t allow the funds to be used for things like "business purposes", "educational uses", and "new property purchases". But just because one lender tells you something like that, it doesn’t mean another lender won’t allow it. You’ll just need to call around until you find a lender that will work for you.
Here’s a blog post that might help you out when you’re calling around:
What You Need to Know When Shopping for a HELOC
Good luck.
Thanks for the reply Kyle. I've heard that HELOC from primary residence can only be written off if the HELOC was used for remodeling purposes, not for investing purposes. But a HELOC from investment property used to buy another investment property can be written off since it's a business expense. True?
Generally speaking, let's say a bank will allow HELOC from both primary residence and investment properties, for investing purposes. Will both HELOCs usually have the same interest rate? Or will a HELOC from an investment property usually have a higher interest rate?
Thanks for the reply Kyle. I've heard that HELOCs from primary residence can only be used for remodeling purpose not be for investing purposes. But I have still yet to confirm that because you said that some banks will not allow HELOCs from investment homes to be used for investment purposes. So it just sounds like it all depends. Generally speaking, let's say a bank will allow HELOC for investing purposes. From both primary and investment properties. Will both have the same interest rate? Or will a HELOC from an investment property have higher interest rate?
If the day after you open a HELOC on your primary, there's a shiny black Porsche in your driveway, is your bank patrol going to knock on your door and say, "Excuse me, sir...you're under arrest and we're confiscating your home"? Regardless of what they want, you can spend it how you please. You can use it for a 2-week vacation to New Zealand, you can pay for hookers, you can buy a new living room set for your parents, it's your choice. The more pertinent question is if you're using it wisely. For most of us, using it to buy a Porsche might not the best course of action. Using it to improve a home is often a better decision. Banks often don't want you to invest in other homes - to me, that's ridiculous. It's one thing if you're mortgaged to the hilt, but lenders aren't going to 100% LTV when they give you that HELOC. Besides, you're doing your research before buying/renovating the property you're using the HELOC on...if anything, you'll pay that HELOC back and have more wealth.
The bigger issue you will run into is getting a HELOC on a non owner-occupied property. Only a select number of lenders do them and the credit requirements tend to be higher. Additionally, you're looking at 1-1.5% higher in rate. Doesn't mean the rates are terrible, just a little higher than a HELOC on an owner-occupied home.
What about the Question on whether or not the mortgage interest and repairs can be written off? Does it matter where the heloc is obtained from? From primary residence vs from investment property.
It doesn't matter what type of property the HELOC is secured by....if you're using the funds to purchase/repair an investment property then the interest paid on those funds will be tax-deductible against the investment property.
@Jason Y.
To answer your question, the irs allows interest deductions from cash out financing if the cash is used for capital improvements on your residence, when taken out on your residence. So, what you heard is basically correct. If you take equity out of your primary residence, the irs allows deduction of the interest payments (never principal) on your return.
That’s the more “technical” answer I think you were looking for from your post.
I haven’t read anything about when you take equity out of an investment property. However, I personally figure it’s just another interest expense and thus deductible against that property.
From my understanding, due to the new Job Cuts and Tax Act, when you take out a HELOC from your primary, only the interest mortgage that is used to improve the primary home (not used for business expense like investing in an investment property) can be written off. However, when you take a HELOC from the investment property, because it's off the business property, then it's considered a business expenses. Small nuances. Need to validate with a tax expert.