Hello, my friends and welcome to another episode of Ask Marco where I answer your investing related questions.

Today's question is a great one. It's from Kelly. It's basically should I use a heat lock for my down payment and she writes in and says, hi, Marco. I just would like to start with how amazing your podcast is and you have really helped me outline a plan for financial freedom while Kelly, you're welcome. I just purchased a home that I live in and I'm interested in using a HELOC to purchase a rental property. This seems risky to use my home like this but would love your thoughts





Okay, so for those listening and are wondering what HELOC is, I think many of you understand what he lock is, but for those that don't, a HELOC is a home equity line of credit. So it's just the acronym for home equity line of credit and it's really just a loan.

Actually, it's not even a loan. It's a line that you can draw from that is secured by your home. Typically it's recorded as a second or third lien on your property and you draw from it just like you would a credit card. Uh, you don't pay any interest on it while you have it until you actually use it. And typically these are issued for a term of 10 years and after that, you have to renew it or it just closes. So the HELOC is interesting because it's typically a line of credit that you can draw from any time at will for as much as you want. You use it and whatever you don't use, you don't pay for, it's typically a very low-interest rate and it's just secured by your property, which is the reason why you can get them for such a low rate of interest.

And in addition to that, the terms are typically interest only. So you can draw out say $1,000 or $20,000 or whatever it is up to your limit and just pay the interest-only payment each and every month until you pay it off in whole or in part with no penalty. So it provides for a ton of flexibility. And for those of you that this actually makes sense for, you should look into it because if you have enough equity in your home or even in a second home or a rental property, there are lenders out there willing and wanting to provide these lines of credit that you can use for anything. They could be used for a home, improvements for investments, they can be used for travel. Although you know the the whole idea of using a HELOC for consumer debt is really pretty stupid. I wouldn't use it for anything that is considered consumer expenses or in consumer debt.

So using it for a vacation or a car or anything that's a depreciating asset is pretty silly. But for investment purposes, it can make a lot of sense because there's a lot of people out there, particularly in coastal markets that have a lot of equity tied up in their property or properties, and you can call that equity dormant, dead idle, but whatever you call it, it's not doing you any good. It's sure it's on your personal balance sheet. It's part of your net worth. That's fantastic. But now the question is, is how can I put that to work to increase my wealth, maybe increase my cash flow and do more good for me and my family. So that's the gist of this question from Kelly. And here's what I have to say about that. Well, I've already told you half of it and you know, that's basically how it works.

Currently, HELOC rates range between a low of about 2.9% to as high as 21% if you have decent credit, you're not going to be anywhere near that. But it does depend on the borrower's creditworthiness and obviously some other factors. But as of this recording, the average HELOC rate is about 6% just right around 6% so very inexpensive rate for a line of credit that you can draw from at will for whatever you need. Now let's take an example. I always love using the example of the a hundred thousand dollars property. So if you are purchasing or investing in a $100,000 rental property, getting an 80% loan and you need a 20% down payment, then you would just draw from your line of credi...