The Federal Reserve announced a quarter-percentage-point interest-rate hike Wednesday, to a range of 3.75%-4.0%

"I have a second property which is totally paid off and I have it rented out." (Photo subject is a model.)

Dear Quentin,

I have a second property which is totally paid off and I have it rented out. If I applied for a home-equity line of credit (HELOC) for $50,000 based on the rental income, would it be a problem given that there is no primary mortgage? Is this a good time to take out a HELOC? I would like to build up my cash reserves - and I have some bills to pay.

The Landlord

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The economic backdrop can affect lending standards and how willing banks are to extend credit.

Dear Landlord,

There are some pros, my friend, and a few cons.

Let's start with the basics. A HELOC is secured by your rental property, just like a mortgage. If there is no existing mortgage, the HELOC lender can take a first lien on the property, meaning the HELOC would be the first and only debt secured by the property. That's not necessarily a problem for the lender, although nor does it guarantee approval.

But your approval will depend on many factors, including your credit score, income, assets, rental income from this property, and any other loans you may have. And, yes, the economic backdrop can affect lending standards and how willing banks are to extend credit. Getting a "yes" is never a sure thing.

That said, a recent Federal Reserve's Senior Loan Officer Opinion Survey on Lending Standards concluded that HELOC standards were unchanged and demand had strengthened - although it also noted that lending standards remained at the tighter end of their historical range for most loan categories.

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As for the cons, which basically cover the paperwork, the lender may want documentation showing that your property actually generates rental income - so be prepared to show them the lease and your annual tax returns. You may have to shop around, as some lenders don't offer HELOCs on rental properties.

I'm curious why you need this $50,000, and it's heartening that you're not taking it out of your IRA or 401(k), where you would lose the potential for future investment returns on those portfolios if you pulled money out. For example, I would be wary of taking out debt secured by a property to pay off unsecured debt such as a credit card.

You would be putting your property at risk to pay off a debt that isn't secured by your home. That said, taking out a HELOC could be considerably less expensive than carrying double-digit interest on a $50,000 credit card. A note of caution: The average rate on a HELOC is variable, so the rate you receive could also change over time.

Using a HELOC allows you to keep your retirement investments invested, but you will also pay interest on any money you borrow. Using a HELOC for a year or two as a temporary bridge is different from carrying $50,000 of debt for many years on a credit card or incurring other penalties from unpaid bills, although the interest costs can still add up quickly.

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Taking out a HELOC to build up your emergency fund is the financial equivalent of the tail wagging the dog. It should be the other way around: Your emergency fund should be paying off the HELOC. After all, an emergency fund exists to prevent you from having to make a radical decision at an inconvenient time.

Is it a good time to take out a HELOC? Interest rates have remained stubbornly high in recent years, as economists have expressed concerns about inflation. The Federal Reserve, as expected, announced a quarter-percentage-point interest-rate hike Wednesday to a range of 3.75%-4.0%, the first such rate increase since July 2023.

Your decision ultimately depends on your financial circumstances - including how urgently you need the money, the rate and terms you're offered, how quickly you expect to repay the balance, and whether you can comfortably make the payments if the interest rate rises. Put your income and expenses on paper, and give yourself a five-year stress test.

You, and only you, know your own finances best.

By emailing your questions to The Moneyist or posting your dilemmas on The Moneyist Facebook group, you agree to have them published anonymously on MarketWatch.

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-Quentin Fottrell