So my wife and I have a significant amount of equity in our home. I am interested in using the equity via a HELOC to purchase my first rental property. I am curious as to how this process works and am looking for someone to explain in a fair amount of detail.
1. If I go get a HELOC for say $100k. I realize that as soon as I make a draw I have to start paying the interest. So let's say I draw the full $100k and take it to go buy a property. Once I get the property and rehab it/rent it out, how do I put a mortgage on that rental property and get out of/pay off the HELOC on my primary residence? I rather have only 1 mortgage on my primary residence, so my goal would be to get the HELOC on the primary cleared as soon as possible.
Is there a way that HELOCs are rolled into Mortgages? Just looking for some explanation. Thanks in advance!
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
4y
The HELOC is secured against your primary residence, but is an expense of your investment property. Once you rent out the property, you really have two choices:
1. Pay the HELOC using rental income.
2. "Refinance" the HELOC into a fixed rate and term mortgage.
As long as you spend the HELOC on an investment property, the interest from the HELOC is deductible against income on that investment property. So the HELOC or rental property mortgage is different than your primary mortgage. I say different because the expense is paid from rental income and you deduct the interest against your income on taxes. Think of it as a business loan and business expense.
So no the HELOC will not roll into a mortgage, but you can use mortgage proceeds to pay off the HELOC when you finance. Also note that this technically is not a refinance of the rental property, because you never had financing secured against the rental property. You technically paid cash for the rental using money borrowed from your HELOC.