Should You Take Out a HELOC on Rental Property Right Now?
The Fed raised rates to 3.75%-4.0%. Homeowners weighing a HELOC on paid-off rental property face a tougher borrowing landscape.
The Federal Reserve raised its benchmark interest rate by a quarter percentage point Wednesday, pushing the target range to 3.75%-4.0%, a move that directly affects variable-rate borrowing products such as home equity lines of credit.
For property owners sitting on paid-off real estate and considering tapping that equity, the timing carries meaningful implications. A HELOC is a revolving line of credit secured by a home or investment property, and its interest rate typically floats with the federal funds rate — meaning borrowing costs rise alongside Fed hikes.
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With the Fed in an active tightening cycle, a $50,000 HELOC drawn today would carry a higher rate than the same credit line opened a year ago, and potentially higher still if the central bank continues raising rates. Borrowers need to weigh the cost of that variable-rate debt against the expected return or necessity of the cash they intend to access.
A rental property that is fully paid off represents substantial equity and a relatively strong collateral position for lenders, which may ease approval. However, lenders typically apply stricter standards to investment properties than primary residences, which can affect both the rate offered and the loan-to-value limits available to the borrower.
Financial advisers generally caution that rising-rate environments increase the risk profile of variable-rate products, particularly for borrowers who may not repay quickly. Locking in a fixed-rate alternative, such as a home equity loan, could offer more payment predictability in the current climate. Continue reading at MarketWatch.com.
