let’s talk: HOME EQUITY
This week I am teaming up with U.S. News & World Report again to talk about home equity! I will even dive into how myself, and the our NY investor group have used property equity to grow our rental portfolio.
So, as we do, let’s talk Real Estate, let’s talk HOME EQUITY….
Let’s start with the basics shall, we?
FIRST OFF – WHAT IS EQUITY? & WHY IS IT IMPORTANT?
Your home equity is the difference between what your home is worth on the market and how much debt you owe on the property.
Your home equity can be a SUPER valuable asset that you can actually borrow against.
WHAT IS A HOME EQUITY LOAN?
A home equity loan is a financing product that allows you to borrow against the value of the equity in your home.
HOW DO I APPLY FOR A HOME EQUITY LOAN?
Luckily, applying for a home equity loan is pretty similar to applying for any conventional mortgage – so nothing new or scary here to expect.
The process should look a little something like this:
(1) Find a lender or a mortgage broker
(2) Submit an application
This will be provided to you by your lender or mortgage broker.
(3) Submit your backup documentation
This includes but is not limited to your current mortgage statement, property tax bill and proof of income.
(4) Home appraisal
The lender will want to confirm the value of your home and will hire a third party to conduct a home appraisal.
The amount you may ultimately be allowed to borrow depends on the bank and the LTV (loan to value) that they allow. On average, you cannot borrow more than 85% of your home’s value.
WHAT CAN I USE MY HOME EQUITY LOAN FOR?
Home equity loans can be used to help cover large expenses such as home repairs, home improvements, college tuition, etc. They can also be used to help you purchase a second home or consolidate high-interest debt.
SOUNDS TOO GOOD TO BE TRUE SO WHAT ARE THE RISKS INVOLVED HERE?
By taking out a home equity loan you are essentially “losing” some of the equity you have built up over time. This means you essentially own less of your home.Risk of foreclosure
Similar to a conventional mortgage, if you are unable to make your payments, there is always the risk that the bank foreclosures on your home.
Potentially higher costs
A home equity loan could be a long-term loan for a short-term expense. If you could pay off the targeted expense within a few years, it may not make sense to pay interest on a home equity loan for up to 15 years.
Payment due upon home sale
The minute you sell your home, the balance of your home equity loan would be due as well. If you used the money from the equity loan to make home improvements that increased your home’s value, that should hopefully cover the remainder of your loan balance. You run into trouble if your home’s value remained the same or decreased… in this event, you may find yourself with a larger bill than the proceeds from the sale of your home could cover meaning you would be forced to pay the remainder of this balance out of pocket.
In order to qualify for a home equity loan you typically need a good credit score (on average, at least 680), solid proof of income and at least 20% home equity in your home.
I KNOW, I KNOW THAT SOUNDS INTIMIDATING. SO LET’S TALK THE BENEFITS OF A HOME EQUITY LOAN.
Home equity loans typically offer a fixed interest rate with predictable payments whereas if you use a credit card or variable-rate personal loan for your home repairs / college tuition / investing in a second home, etc you may face variable interest rates leading to unpredictable payment amounts.Lower interest rates
Home equity loans usually have lower interest rates than credit cards and other types of unsecured debt.
There are potential tax deductions available depending on how you use your home equity loan. Be sure to consult a tax professional to learn about the tax advantages available to you.
NOW, I MENTIONED ABOVE THAT WE HAVE PERSONALLY TAKEN ADVANTAGE OF OUR PROPERTY EQUITY UP IN NY… let’s talk, WHAT DID WE USE IT FOR & HOW?
The first home we ever purchased as a group was done so with CASH, so we had 100% equity in that home. We really wanted to expand our group, but did not have a ton of cash to do so. SO, instead of doing a home equity loan (which you cannot typically do with an investment property), we leveraged the equity in Property #1 to purchase a much larger Property #2. We were able to pull the cash out of Property #1, use that cash to cover the down payment of Property #2, and group both homes together under 1 blanket mortgage, with very little out of pocket funds used!!
This article and personal anecdote just go to show you that, your home equity is TRULY valuable and can be used in SO many different ways. While I am not one to ever encourage taking on debt, if done properly, and responsibly, it can help you scale your business, go back to school, or even add value you to your home! If you want to learn more about home equity and home equity loan products, check out the U.S. News & World Report article on the subject matter here: https://loans.usnews.com/home-equity-lenders
Feel free to comment on the blog post HERE and let us know what YOU think!
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Me – this is based on my own personal experience!