Thanks to skyrocketing home prices, American homeowners are flush with equity in their homes. It was reported that over 47% of mortgaged homes across the United States are considered equity rich. Today, we’re going to talk about what this amount of equity could mean for the American homeowner.
You’re going to learn why now is a great time to leverage your home to buy a rental property, and how to do it. We’re going to talk about specific lending products you can use, their pros and cons, and what to consider before you use this strategy. Click play on this episode of Investing in Real Estate to learn more!
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One of my favorite financial mantras is “you can’t eat equity.” Why would you let that untapped potential sit there, when you could instead use it to improve your financial situation?
Generally speaking, most banks will allow you to borrow against 80% of your equity. And according to the St. Louis Federal Reserve, homeowners are collectively sitting on nearly $30 trillion in home equity.
So if you’ve got a financial goal you’re striving toward, whether it’s investing in real estate or paying off high interest debt, tapping into that home equity can be a smart way to make progress.
There are three main ways you can obtain a loan on your equity – let’s go through them.
- The home equity loan. A home equity loan gives you access to a lump sum of money that is based on the available equity in your home. This is a very straightforward banking product. The lender assesses your home value and then funds your loan. The terms and interest rate are going to be separate from your original mortgage. You can expect a fixed interest rate with monthly installments. Like I said, very basic, traditional loan product. This can be a good option for anyone who has an exact amount they’d like to use, or someone who wants consistent, predictable payments.
- The home equity line of credit. A home equity line of credit, or a HELOC, is a revolving line of credit. This means it works more like a credit card than a traditional loan. You start out with a zero balance, so you have the flexibility to rinse and repeat as you pay things down. The HELOC also tends to have variable interest rates, as well as a draw period, where you’ll only pay back interest, and a repayment period, where your payments consist of the funds you borrowed plus interest. Like the home equity loan, a HELOC is a supplementary product to your mortgage – it does not replace it. A HELOC might be more favorable for borrowers who want flexibility, want funds for future access, or want to start out with interest-only payments.
- Cash-out refinance. A cash-out refi is a loan that refinances the original loan. While the home equity loan and the HELOC are referred to as second mortgages, a cash-out refinance replaces that first mortgage entirely. It pays off your first mortgage, then you get to keep the remainder in cash.
Deciding which loan product is best is up to you to decide. But as I mentioned, my personal favorite is the HELOC. And here’s why: the account starts with a zero balance. So you can have this great line of credit at the ready, and have the ability to take action on a deal when it comes across your desk. Plus, at this time, doing an entire refinance doesn’t make sense for most buyers who are already locked into lower interest rates.
If you’re considering buying a rental property with your home equity, here’s what you should understand:
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Because mortgage rates have started to decline, it’s a great time to buy real estate.
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The current housing shortage offers opportunities for investors, as long as you buy in the right markets with plenty of demand.
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If you can get a deal with returns higher than your home equity product’s rate, you’re likely making a smart move.
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Investing now allows you to buy real estate before prices explode – setting you up to capture even more equity in the coming months and years.
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Only take out a loan against your home’s equity if you’re confident in your ability to pay it back.
And if you’re interested in hashing out if this strategy is right for you, I encourage you to get on the phone with one of my team members. We love talking to investors about their goals and helping them determine which strategies can help them achieve financial freedom. So come on over to our website, morrisinvest.com, click the red button, and tell us when to call.
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DISCLAIMER: I am not a financial adviser. I only express my opinion based on my experience. Your experience may be different. These videos are for educational and inspirational purposes only. Investing of any kind involves risk. While it is possible to minimize risk, your investments are solely your responsibility. It is imperative that you conduct your own research. There is no guarantee of gains or losses on investments.
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