The pros & cons of HELOCs
Pros of a HELOC
There are a number of advantages to using a HELOC to finance a vacation rental property, including:
- Flexibility: With a HELOC, you have access to a revolving line of credit, which means you can borrow and repay funds as needed. This can be particularly useful for financing a vacation home or other investment property, as you can continue to access this credit to make renovations or repairs.
- Low interest rates: HELOCs typically come with lower interest rates than other types of loans, such as personal loans or credit cards. This can save you money in interest charges over time.
- Initial interest-only payments: The typical draw period for a HELOC is 10 years, when you only have to repay the interest (though you can pay back the principal too).
Cons of a HELOC
HELOCs also come with some potential drawbacks, including the following examples below:
- Variable interest rates: Unlike fixed-rate loans, your HELOC interest rate can increase as the prime rate changes. This could mean low monthly payments at first, then possibly higher payments later on.
- Risk of foreclosure: Since a HELOC is secured by the equity of your primary home, there is a risk of foreclosure if you’re unable to make your payments or don’t get as many bookings as you anticipated. This can put your primary home at risk, which is a significant downside.
- Extra debt: Taking out a HELOC increases your debt load, impacting your credit score.
