It is a type of the second mortgage that works like a credit card. Access to a credit line with a set dollar amount is defined by your lender, and you draw on that credit line up to the limit as needed.
This credit line period is called the draw period and lasts for a certain period of time like 10 years and during this time you will make interest-only payments and once the draw period is over you cannot draw anymore and must start making principal and interest payments until your full borrowed balance is repaid.
Let us suppose you have a HELOC limit of $100,000, a HELOC works very similar to a credit card, and we take that $100,000 limit to buy an investment property, so half of the HELOC would be $50,000 which could be used to buy an investment property outright without any liens or other debt so we have a $50,000 balance and this property will generate a $1000 in terms of cash flow.
There is no restriction on the way a HELOC fund needs to be spent, It can be utilized for –
- Home improvement purpose
- For consolidating debts with high-interest rate
- Buying investment property.