How Do I Qualify
Each co-investor has its own qualification thresholds, investment principles and repayment terms.
Noah is not a debt solution, said Sahil Gupta, founder of the firm. We look at the home as an asset, the equity homeowners have and their financial profile.
Noah requires a credit score of at least 600 points, which is lower than what lenders typically seek for mortgage cash-out refinances and home equity lines of credit, or HELOCs. Banks usually require at least 680. But so does Unison.
Co-investors also consider how debt-burdened borrowers are. Unison doles out cash to homeowners whose mortgage has a loan-to-value ratio of up to 75%. Haus and Noah, meanwhile, will go up to 90% LTV.
Best Uses Of Home Equity
If youve built up equity in your home over the years and are looking for a smart way to leverage it, there are a few ways to do it.
1. High-Value Home Improvements
One of the most common uses of home equity is to invest in home renovations and upgrades. The improvements that you make on the home will increase the value of your home and build more equity as a result, said Jared Weitz, founder and CEO of United Capital Source in Great Neck, New York. In some instances, home improvement projects such as adding insulation to your attic or installing solar panels can, over time, generate more value than the cost to complete.
Thats not always the case, however. Some home renovations actually contribute to a lower home value. So before you borrow against your equity for a fancy kitchen upgrade or new pool, be sure its going to help, not harm, the resale value.
2. High-Interest Debt Consolidation
If you have other types of debt that are accumulating interest at a much higher rate, using your home equity to consolidate it could be a smart move, according to Tony Matheson, a certified financial planner and founder of Matheson Financial Partners in Walnut Creek, California.
3. Emergency Fund
Ideally, you have about six months worth of expenses tucked away in an emergency fund with your bank or credit union. But, as we all know, things dont always work out ideally.
4. Real Estate Investing
Considerations Before Using Equity To Invest
Before accessing your home equity to invest, you should make sure that you can service the costs associated with the loan, including repayment of the loan principal. Its also a good idea seek professional financial and tax advice regarding the potential risks and benefits of geared investing. The key thing is to do you research, have a clearly thought-out investment strategy and chat to your financial advisor.
Interested in using your equity to build wealth, but unsure if the stock market is for you? You could also consider investing in real estate and growing your property portfolio.
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Smooth Out Lifes Bumps
Life events like buying a new car, taking a holiday, or paying for education expenses can make us feel stressed about managing the costs.
However, using the equity you have in your home can be a way to ease the financial burdens that life throws at you.
Borrowing against your equity can help you pay off the loan over a longer period of time, reducing the impact of large one-off payments.
Youâll also need to cover the interest charged every month, with the amount borrowed to be paid off at some point in the future.
Term loans are another possibility, but these are best discussed with your banker.
Who Exactly Is Suggesting This Idea
Like the poor folks in Mr. Ledbetters example take a look at anyone suggesting this idea to you with a very jaundiced eye. What is in it for them? Are you the only one with any real skin in the game?
In the example above the bank won at last twice. They got the interest on the loan and their brokerage unit made money via fees and perhaps other sources on the investment side. They had no skin in the game and will likely come out whole even after the foreclosure.
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How To Leverage Home Equity
There are a few ways homeowners can tap into the equity theyve accumulated.
One option is a home equity loan. This type of loan is similar to a traditional mortgage, which is why its also sometimes referred to as a second mortgage. Home equity loans are installment loans, which means the funds are disbursed in one lump sum and paid back over time in equal payments. Theyre also backed by you guessed it your homes equity. Usually, home equity loans have a fixed rate thats a bit higher than the primary mortgage but can be much lower than rates on other types of borrowing.
Another way to leverage home equity is through a home equity line of credit, or HELOC. Unlike a home equity loan, a HELOC allows you to borrow against your equity repeatedly and then pay off the balance, much like a credit card. Some HELOCs require that a minimum amount is disbursed initially, but there are no closing costs. Many HELOCs also provide a debit card and checks that you can use to easily access the funds.
There is one more option known as a cash-out refinance. Rather than taking out a secondary loan or line of credit, this involves refinancing the mortgage for a higher amount and taking the difference in cash. Even though you dont necessarily take on an additional loan with this method, you still increase your overall debt load and pay closing costs.
This And Other Personal Finance Questions Are Answered
In this episode of Motley Fool Answers, with the help of Motley Fool Wealth Management financial planner and tax expert Megan Brinsfield, we’re answering your questions about finding or becoming a professional financial planner, using your stimulus check to jump-start your child’s retirement savings, and lots of tax stuff.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on March 30, 2021.
Alison Southwick: This is Motley Fool Answers. I’m Alison Southwick, and I’m joined as always by Robert free-frappa-lula Brokamp, personal finance expert at The Motley Fool.
Robert Brokamp: Where the helicopter did that come from?
Southwick: Hey, in this week’s episode, it’s the March Mailbag and we’ll be answering your questions on using home equity to buy stock, reducing required minimum distributions, and botching the backdoor Roth. All that and more on this week’s episode of Motley Fool Answers.
Hey, Megan Brinsfield is back. She heads up the team of financial planners over at Motley Fool Wealth Management.
Brokamp: A sister company of The Motley Fool.
Southwick: Beautiful. We’re so excited to have you back answering your questions. What’s fun is Bro didn’t realize that that was coming, and he was going for a sip of water right at the exact moment, so good job, Bro.
Brokamp: Thanks.
Brinsfield: Yes.
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Need Cash Now You Can Sell The Equity In Your Home To Investors
- California-based Point is a 2-year-old fintech company specializing in home equity contracts. It offers homeowners cash for a share of the home’s equity, that is, the amount the home is worth beyond the value of the mortgage.
- It will give up to $250,000 depending on the value of the home and the strength of the real estate market that the house is in.
- Point is the broker in the deals and funnels the contracts to investors. It just got $100 million in potential contract backing from Kingsbridge Wealth Management.
There is a new way to take cash out of your home with no monthly payments and no interest. It’s not a loan. It’s not a mortgage. It is a contract with an investor who wants to purchase some of your home equity in cashbut it can be costly in the end.
California-based Point is a 2-year-old fintech company specializing in home equity contracts. It offers homeowners cash for a share of the home’s equity, that is, the amount the home is worth beyond the value of the mortgage. It will give up to $250,000 depending on the value of the home and the strength of the real estate market that the house is in.
Point is the broker in the deals and funnels the contracts to investors. It just got $100 million in potential contract backing from Kingsbridge Wealth Management.
What Types Of Homes Will They Invest In
Unison, Noah and Haus invest in single-family homes and condominiums that are typical for the local market. This allows co-investors to easily appraise the residences they buy into.
If your neighborhood has mostly houses that have three or four bedrooms, and you have a 20-bedroom chateau, we cannot work with you because we don’t really know what it’s worth, said Thomas Sponholtz, founder of Unison. It just has to be not an abnormal house.
While they prioritize primary residences, some equity-sharing firms also consider rental properties and second homes.
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The Hidden Benefits Of Downsizing
Many retirees decide to downsize in retirement, and doing so comes with potential added benefits â you can cut many home-related expenses. The Center for Retirement Research at Boston College found that empty-nesters were spending 30% of their income on property taxes, insurance, maintenance and utilities.3
The question for downsizers then becomes what to do with all of the unleashed capital. âThereâs no single right answer,â says Imundo. âYou and your advisor can look at all of the options to help figure out what might work best for what you want to achieve.â Then you can move on to focus again on the people and things that matter most to you â and create new memories, perhaps in new places.
1 Gallup, âWhat Percentage of Americans Own Stock?â August 13, 20212 U.S. Census Bureau, “Wealth, Asset Ownership, & Debt of Households Detailed Tables: 2018,” September 20213 Center for Retirement Research at Boston College, âIs Home Equity an Underutilized Retirement Asset?â 2017
Banking, mortgage and home equity products offered by Bank of America, N.A., and affiliated banks, Members FDIC and wholly owned subsidiaries of Bank of America Corporation. Equal Housing Lender. Credit and collateral are subject to approval. Terms and conditions apply. This is not a commitment to lend. Programs, rates, terms and conditions are subject to change without notice.
- Learn how you can help renovate your home without wrecking your budget
Ways To Tap Your Home Equity
You donât have to sell your home to put your equity to work for you, of course. âThere are three main ways to tap your homeâs value while youâre still living there,â says Marie Imundo, director, Wealth Management Mortgage Strategy and Execution, Bank of America. They are a home equity line of credit , a home equity loan and a cash-out refinance. âThe best choice for you will depend on interest rates and what you need the money for.â
With a cash-out refinance, you get a new loan, ideally at a lower rate, to pay off your existing mortgage, plus some additional money from your home equity, which you might use to cover a home renovation project, or to help you manage any number of other current expenses. Cashing out your home equity is an option you might want to consider if you have a first mortgage on which youâre paying a higher interest rate than is currently available. âKeep in mind, though,â says Imundo, âthat your new loan balance will be higher than your current loan, leaving you with a larger mortgage, typically a higher monthly payment and the potential to pay more interest over the life of the loan.â
A home equity loan may make the most sense for a fixed expense â say college tuition that you might want to pay off over a number of years â while generally a home equity line of credit is used for recurring items, like home renovations, which may require frequent and varied withdrawal amounts.
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How To Use Equity To Invest In The Share Market
When it comes to borrowing money to invest, property often springs to mind. But did you know that real estate isnt the only investment avenue you can explore? You could also use your equity enter the stock market and invest in things like individual stocks, managed funds and exchange-traded funds .
Once youve established yourself as a homeowner, you might be thinking: okay, whats next? If youve achieved your goal of getting into the property market and paid down some of your mortgage, you could start looking at other paths to diversify your investments and build wealth.
One way is to leverage some of the equity in your home to start investing in the share market. This kind of investment is more risky than investing in property, so its important that you proceed cautiously and seek out professional advice before you press ahead.
On the other hand, if youre looking at borrowing to invest, equity may give you a way to do that at the interest rate you have on your home loan which is likely much lower than those available on credit cards or margin loans.
But first, we need to determine how much equity you might have to work with.
Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our loans reporters and editors focus on the points consumers care about most the different types of lending options, the best rates, the best lenders, how to pay off debt and more so you can feel confident when investing your money.
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How Much Could You Borrow For An Investment Property
Using the example above, letâs say your home is valued at $400,000 and your mortgage is $220,000. Hereâs the breakdown of sums:
- value of your property – $400,000
- value of your property at 80% – $320,000
- minus your mortgage – $220,000.
This means your useable equity would be $100,000.
Learn how to estimate your propertyâs equity using the NAB app or use our equity loan calculator on our website.
The Value Of Your Home Can Decline
Keep in mind that theres no guarantee that your home value will increase substantially over time. Your home may even lose value in times of economic downturn or suffer damage from fire or extreme weather.
If you take out a home equity loan or HELOC and the value of your home declines, you could end up owing more between the loan and your mortgage than your home is worth. This situation is sometimes referred to as being underwater on your mortgage.
Say, for example, that you owe $300,000 on your mortgage but the home prices in your area tanked, and now the market value of your home is just $200,000. Your mortgage would be $100,000 more than the value of your home. If your mortgage is underwater, getting approved for debt refinancing or a new loan with more favorable conditions is much harder.
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What Is Home Equity
Home equity is the portion of your home that youve paid off. Its the difference between what the home is worth and how much is still owed on your mortgage. For many, equity from homeownership is a key way to build personal wealth over time. As your homes value increases over the long term and you pay down the principal on the mortgage, your equity grows.
Equity provides many opportunities to homeowners, as its a great source for savings and for financing, says Glenn Brunker, president at Ally Home. For example, the equity amassed in a starter home may later provide the down payment needed to purchase a larger home as a family grows and needs more space. Its a time-tested way to build wealth.
Home equity is typically used for big expenses and often represents a more cost-effective financing option than credit cards or personal loans with high interest rates.
Investing In The Stock Market
Investing in the stock market comes with no guarantees. However, watching the growth of the S& P 500 over the past 10 years may encourage some homeowners to use their home equity loan proceeds to invest in the markets, in hopes that theyll get a return larger than what theyll pay in interest.
Taking a loan out against a property to try to capture the next unicorn is incredibly risky, says John Mazza, president and CEO of Summerfield Wealth Advisors and former financial adviser with Southeast Financial Services in Greensboro, N.C. Everybody wants the unicorn, but slow and steady wins the race with the markets.
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Pros And Cons: Stocks
For most investors, it does not take a huge cash infusion to get started in the stock market, making it an appealing option. Unlike real estate, stocks are liquid and are generally easily bought and sold, so you can rely on them in case of emergencies. With so many stocks and ETFs to choose from, it can be easy to build a well-diversified portfolio.
But as noted above, stocks tend to be more volatile, leading to a more risky investment, especially if you panic sell. Selling your stocks may result in a capital gains tax, making your tax burden much heavier. And unless you have a lot of money in the market, your holdings may not be able to grow much.
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More volatile than real estate
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Selling stocks can trigger big taxes
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Some stocks move sideways for years
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Potential for emotion-driven investing
