Home Equity Line of Credit (HELOC)

A home equity line of credit is a revolving loan secured by a property, usually as a second lien, that the borrower can draw, repay and draw again up to a limit. Investors use HELOCs to fund down payments on rentals, which puts a new debt payment next to the DSCR loan.

Most HELOCs are interest-only during the draw period with a variable rate tied to the prime rate. The payment grows when the balance or the index rises, and it jumps again when the draw period ends and principal payments begin.

Money drawn on a HELOC against a primary home to buy a rental does not show up in the rental's DSCR, since the lien is on a different property. It still has to be paid, so count it in your own cash flow. On a rental, a HELOC behind a DSCR loan is a second mortgage, and its payment comes out of the same rent.

Further reading: Home Equity Line of Credit (HELOC) on Wikipedia.