As indicated, there are some very positive short-term uses for the money. If you decide that an equity line of credit is right for you, you will pay a fee to get the loan. This can range from a few hundred dollars and up. You will also have to pay an annual fee, just as with some credit cards. This should be under $100. As with all mortgages, the better your credit, the lower your debt ratios, and the lower the loan-to-value ratio, the lower the fees. The term of the loan can be as long as thirty years, and the payment can be anything from interest only to payment of both interest and principal (amortized). It will usually be interest only, comparable to your minimum payment on a credit card. You can, of course, pay more than the required amount. As with any mortgage loan, shop around. Start with your bank and credit union. Get quotes from a mortgage broker.
Be sure the loan suits your purpose. Will you pay it off in a short time when the investment is sold? If so, the interest rate may not be too important and paying interest only may be the way to go. Look for the lowest fees and be sure there is not a prepayment penalty. A reputable lender will not impose any prepayment penalty.
If you already have an equity line, have run up high debt, and believe interest rates are going up, do not wait. Refinance or convert as quickly as possible. You will initially have to pay a higher interest rate on your new loan, but you will have a definite payment amount for the future. Even if you have to get an adjustable loan, it will have a reasonable cap. A line of credit can be used to save or even make money. The following is a complex example that will not apply to most readers.
Example: You have a single-family rental property that you have depreciated, or for some other reason, would like to exchange. A property exchange is a way of selling and buying real estate without paying tax on the profit from the sale.
Under the usual method of making an exchange, using Section 1031 of the Internal Revenue Code, you would sell your property (called the relinquished property) and then buy another (called the replacement property). There is a definite procedure for this in order to qualify, consult your tax advisor before attempting it.
Under IRS rules, you can buy the replacement property before you sell the relinquished property. You then have six months to sell the relinquished property. This is called a reverse exchange. The procedure is more complicated and more costly. However, more real estate and tax professionals are becoming competent to guide you through it. Some title companies have exchange departments that handle it.
Getting a line of credit allows you to find a suitable property and get a good deal as a cash buyer. You do not have to disturb the tenant in your rental until you are sure that you have a replacement property. The combination of the cash buyer advantage and not losing a tenant can be worth thousands of dollars.
The financial procedure is simple. Use your credit line to buy the new property. You then have six months to sell your current rental property. Use the money from the sale to pay off the loan from your credit line. The IRS rules are much more complicated..