Home Purchase Mortgage Calculators
Mortgage Program Calculators
Thank you for your service to our country and for submitting your question to FREEandCLEAR. Your best options are a home equity line of credit (HELOC) or a home equity loan. Both options enable you to borrow the money you need to pay for property renovations and pay it back over a 15 - 30 year term, which results in a lower monthly payment. We provide a comprehensive overview of both a HELOC and home equity loan on FREEandCLEAR as well as a comparison of a HELOC to a Home Equity Loan to help you determine what financing alternative is best for you.
Based on the information you provided, a HELOC is likely your best option because the interest rate and monthly payment on a HELOC are typically lower than the rate and payment on a home equity loan. Most HELOCs offer a low introductory rate, sometimes called a teaser rate, for the first month (and potentially longer) and then the rate increases and becomes adjustable, which means it can change and potentially increase further, for the remaining term of the HELOC. Additionally, with a HELOC you generally pay only interest and no principal during the first ten years of the line, which reduces your monthly payment even more. Finally, if you are doing home renovations, a HELOC enables you to draw down funds only as needed, as opposed to taking 100% of the proceeds when the loan closes, and you only pay interest on the outstanding HELOC loan balance. This financing flexibility is another advantage of a HELOC as compared to a home equity loan.
We recognize that it can be challenging to find lenders that offer HELOCs or home equity loans on non-owner occupied properties. Based on our experience, credit unions are your best lender option for non-owner occupied HELOCs or home equity loans. PenFed Credit Union has a strong presence in this product and there may be other credit unions you are eligible to join given your military service. For example, Navy Federal Credit Union also offers competitive HELOC and home equity loan programs. Unfortunately the VA Home Loan Program only applies to owner-occupied properties so it is not applicable to your situation. With a low loan-to-value (LTV) ratio of approximately 40%, however, multiple lenders should be interested in providing you financing assuming the property title and appraisal reports come back clean.
When you contact lenders to request loan proposals make sure to ask if they charge a pre-payment penalty or non-utilization fee for a HELOC. Because you anticipate paying off the loan within a year, you want to make sure there is no pre-payment penalty. Some lenders offer borrowers a closing cost credit but require you to repay the credit if your loan is paid off or closed within a set period of time, usually one-to-two years. Some lenders charge a non-utilization fee if you do not maintain a minimum HELOC balance but this fee should not apply to you given that you intend to draw down the line over the course of the year to pay for property renovations.
Finally, please note that you are required to qualify for the loan based on the lender's borrower qualification requirements which focus on your credit score and financial profile as well as any monthly cash flow or losses attributable to the rental property. Additionally, some lenders including credit unions, may impose additional borrower conditions, such as opening a bank account, to be eligible for the loan.