Use Equity As Collateral
Instead of selling an asset to cash out your equity, you can use it as collateral for a loan. An auto equity loan would allow you to use whatever value has built up in your vehicle to secure a loan. A home equity loan works much in the same fashion except that it is based on the value of a home as opposed to a vehicle. Since an equity loan is secured by an asset, you generally receive a lower interest rate compared to a credit card or personal loan. Equity loans may also come with a lower interest rate than a vehicle title or payday loan.
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I Have Equity But My Bank Has Declined Finance What Next
Weve established that theres probably more equity in the NZ market right now than ever before. Weve also established that the best thing that property investors can do to create future wealth is use it!
But what if youre trying to use equity and have been declined by one of the big banks due to the current tight lending restrictions?
The number one issue were seeing property investors run into right now, is not that they dont have the capital to reinvest its strict lending laws and rising interest rates that are limiting peoples ability to tap into their capital.
Accessing money from a traditional bank is becoming harder, and its becoming more expensive too. But theres one major opportunity available to property investors at the moment that could change the game completely its called second-tier lending.
For a full breakdown of what second-tier lending is and how you can take advantage of it, read this article.
In summary, first-tier lending comes from the major main banks in New Zealand think ANZ, ASB, Bank of New Zealand, Kiwi Bank and Westpac.
Under the Reserve Bank all of the main banks are governed by specific regulations and have rules that they must adhere to. Also, because they are influenced by the Reserve Bank, they all follow the leader when it comes to the rise and fall of interest rates.
These loan providers do however still have to follow responsible lending laws.
Is Heloc On Rental Property Tax Deductible
Thanks to the 2017 Tax Cuts and Jobs Act, property owners benefit from the ability to claim several tax deductions related to their mortgages. Taking out a HELOC on a rental property may bring you some tax advantages.
For starters, you can write off any expenses you incur as a rental property owner. This means that if you take out a HELOC on your rental propertys mortgage, then any interest you pay on the HELOC can be written off as an expense. This can help lower your overall taxable income.
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Ways To Grow Your Home Equity
Over the years of paying down your mortgage, that gap increases and your home equity value grows naturally. If your current property market value increases, your equity will also increase. However, aside from these two, there are also a number of ways you can further build your home equity:
- Increasing your propertys tangible value
You can increase the value of your property through home maintenance and essential repairs. Renovating or remodelling parts of your home like floor replacements, adding a modernised kitchen or building a new bathroom are also good ways to increase your propertys tangible value. Just make sure that the project cost will not outweigh the anticipated added value of your property, as this will be counterproductive.
- Make larger or regular repayments
If you are repaying your mortgage on a monthly basis, you may consider making fortnightly repayments instead or paying additional contributions, if that works for you. This can help you grow your useable equity as it reduces your loan balance faster, together with the interest youll have to pay.
- Observe market trends
Sure, property tends to increase in value over time but certain local investments, government activity, demographics and suburb development can more significantly affect its value. Keep an eye out for potential future plans that may unlock future equity value above just the general value climb over time, and take full advantage then.
Worst Ways To Leverage Equity In Your Home
Home equity can help you achieve your financial goals, but it only works in your favor if you use it wisely. Avoid tapping your equity for any of the following purposes.
SPLURGING ON VACATIONS
Sure, exploring Tahiti sounds like an unforgettable experience, but you should do that on your own dime. Why create a new monthly bill for years on end just to finance one week away? Remember, your home is being used as collateral when you access your home equity and if you cant make your payments, youre at risk for foreclosure.
COVERING EVERYDAY EXPENSES
If youre finding it difficult to manage your monthly bills already, taking on more debt creates a larger problem. Instead, contact your lender to request a mortgage forbearance or a loan modification if youre facing a temporary hardship and worry about falling behind on your home loan payments.
INVESTING IN DEPRECIATING ASSETS
Think twice about using your home equity to buy a brand-new car or new furniture. These items depreciate in value over time, and you can lose your home if you cant keep up with the home equity loan or HELOC payments.
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Can I Take Out A Home Equity Loan To Buy A Second Home
The short answer is yes, you can use a home equity loan to buy a second home. Since the proceeds from a home equity loan can be used for any purpose, that means you can use the money to buy additional real estate if you wish to.
Doing so comes with risk, though. As Adam Spigelman, a senior vice president at Planet Home Lending, explains, You can use a home equity loan to buy another propertyjust be sure youre comfortable with using your home to secure it.
Heres a look at the full pros and cons of using a home equity loan to buy a second house.
How To Use Your Available Equity To Buy A Property
Once you have worked out your available equity, it is time to consider your loan options.
This is a good opportunity to perform a financial health check on your home loan and other loans you may have against your property portfolio.
Items you have to check up on include:
- The current interest rate you are paying compared to other lenders and the current fixed rates vs variable rates
- Fees and structures compared against other lenders
- Whether other lenders could offer you a better service based on your current portfolio and loan structure.
If you decide to go ahead and access some of your equity, you will need to see if it will result in any extra fees and charges – for example, lenders’ mortgage insurance or associated fees if you decide to switch to another lender.
Once you have decided on the best option, it is time to contact a lender and get the process started.
Using a mortgage broker has many benefits for you as a property investor.
Brokers have access to many different lenders and loan products through their lending pool and can save you plenty of time and stress by doing the research for you, and applying for your next property investment loan on your behalf.
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How To Find A Lender For An Investment Property Heloc
The best way to find a lender for a HELOC on investment property assets is to leverage your existing network. This is because not all lenders will grant HELOCs for investment properties, making them somewhat tricky to find. Investors should ask mentors and other connections to learn more about HELOC providers. Be sure to consult your most recent lender, whether that be a traditional bank or otherwise, to learn if they know of any options. There will likely be a few potential lenders to choose from, allowing investors to choose from the best approval requirements and interest rates.
Aside from word-of-mouth referrals, investors can also research lenders online or contact previous connections to see what options are available. While it is easier to find HELOC providers for a primary residence, lenders are willing to do the same for investment properties. Often, smaller banks or credit unions are more likely to provide HELOC loans. Search online and be sure to confirm that they finance investment properties.
Va Interest Rate Reduction Refinance Loan
If you have an existing VA loan and you want to lower your interest rate or move from an adjustable interest rate to a fixed rate, then a VA IRRRL may be the right option for you.
You may be eligible for an IRRRL if you:
- Already have a VA loan and
- Are using the IRRRL to refinance your existing VA loan and
- Meet the VAsand your lenderscredit and income requirements and
- Currently live in or used to live in the home covered by the loan.
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Using A Home Equity Loan Or Heloc To Purchase An Investment Property
If youve built up a lot of equity in your home, you might consider using it to purchase an investment or rental property that earns you income.
The process looks like this:
- You apply for a home equity loan or HELOC with a reputable lender.
- You receive the funds or line of credit after closing.
- You use those funds to cover the down payment on the investment property of your choice. In some cases, it may even cover the full purchase price .
As with anything, there are both pros and cons to this financing strategy, so proceed with caution.
On the upside, it allows you to cover a large portion of your new propertys costs, and you may get better interest rates than you would on other products, too. Rates on mortgage products like HELOCs and home equity loans tend to be lower than personal loans or other financing options.
The major drawback, though, is that it puts your property at risk of foreclosure. If you cant make the payments on the HELOC or home equity loan, the bank could seize your house.
Additionally, the loan will require closing costs and the closing process may take longer than an unsecured loan would. Personal loans, for example, often close in just a few days.
What Is Usable Equity
As the name suggests, usable equity is the equity in your home that you can actually access and borrow against. You can work out the usable equity available by calculating 80% of your propertys current value minus what is still owing on the mortgage.
For example, if your home is valued at $400,000 and you have $100,000 owing on your mortgage, you can work out the usable equity with this equation.
Minus $100,000 in existing loans.
You can get an estimate of your usable home equity using this calculator.
Your lender or mortgage broker may require a formal bank valuation to determine the current value of your home and to calculate the usable equity you have available.
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How To Use Equity To Purchase Property
Once your property has equity, the smart thing to do is to revalue the property and draw out the increased amount. Property investors then use that cash as a deposit on the next one or two properties, which also yield rent income and capital growth.
Most property investors dont start out their journey with a big bucket of cash that never empties. The majority of property investors need to borrow money from banks and lenders to get enough cash to buy that first investment.
And the quickest way to buy the next property is to have our first investment pay us back what we borrowed to buy it. In short, we want our properties to pay us back the deposit amount so we can use that money as the next deposit.
The equity equation can begin very early on. In fact, in a perfect world, youll buy a property with equity already in it.
Most people who have purchased or held property over the last few years now have a healthy stash of equity and now is the time to put it to work!
Should You Cross Collaterise
According to loans.com.au Product Manager Tiska Sudarmana, cross collaterisation has its risk but can provide certain benefits under the right circumstances, such as minimised fees.
The equity of your current property is used as security for loans on both this property and another property. So if you cant pay off the debt on one property, then both properties could be repossessed.
However, there are some cases that permit cross collaterisation. For example, the debt on your current property might be too high to allow traditional refinancing.
If you will be able to pay off both mortgages and perhaps have good knowledge of the property market, then this could be an option but be aware of the risks.
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Comparing Va Refinance Loans
VA refinance loans are backed by the federal governments Department of Veterans Affairs but provided by private lenders. Here are the top five things to look for when comparing VA refinance loan providers.
The monthly payments on a mortgage comprise principal, as in the amount remaining on your loan, and interest, as in the money the lender collects for providing the loan. Your APR, or annual percentage rate, consists of the interest rate plus other lender fees. The lower the interest rate / APR, the lower your monthly payments to the lender.
Terms. Like other mortgages, the typical VA refinance loan has a 15-30-year repayment term. There is no right or wrong when it comes to repayment terms whats best for you depends largely on how much you can afford to pay each month. The shorter the term, the higher your monthly payments but the less youll pay in interest over the life of the loan. The longer the term, the lower your monthly payments but the more youll pay your lender in the long run.
Closing costs. Closing costs are the fees and charges owed to the lender when the loan begins and usually range from 3-5% of the loan value. Closing costs for a VA refinance may include origination fees, property appraisal, title fees and insurance, state and local taxes, and various other costs some of which go directly to the lender and some which the lender collects on behalf of third parties. The VA funding fee is a separate fee and isnt impacted by the lender you choose.
How Do Va Home Loan Rates Compare To Other Loans
The interest rates on VA loans tend to be similar to the interest rates on conventional loans, although total APRs for VA loans are higher than equivalent conventional loans due to the funding costs imposed by the Department of Veterans Affairs. However, the additional costs of VA loans are easily offset by the fact that you can get a VA loan with zero down payment and without having to pay monthly private mortgage insurance
As for refinancing, VA refinance rates and VA IRRRL rates are generally similar to a conventional refinance. From a search of top VA lenders, we found that the best IRRRL rates matched conventional rates. Of course, VA IRRRL loans offered added benefits such as streamlined application and no PMI.
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Renovate And Hold Property Investment Strategy
While renovations can be an effective way to boost equity and add value to your property by manufacturing capital growth, it’s not the right property investment strategy for everyone.
Thats because its very easy to overrun your budget – after all, every renovation project is liable to encounter some sort of additional, unexpected cost at some point.
Then there are the surprise costs – once you begin renovating, you may unearth hidden work that requires an investment, but that doesnt add any value.
Its also particularly difficult to get an accurate estimate of how much the work will cost, particularly because costs fluctuate depending on the area, materials, tradespeople used, and the age of the property.
And the rising costs of materials and construction in the current market mean that resources are both scarce and expensive.
Its not all bad news though.
The benefit of renovating and holding an investment property is that you can increase the rental income and the value of the property at the same time.
It can also increase tax depreciation allowances.
Good Debt Versus Bad Debt
Although debt carries a negative connotation, there is such a thing as good debt, too. In general, good debt increases your net worth and/or helps you to generate value , while bad debt typically uses borrowed money to purchase goods or services that have no lasting value, like a fancy car or material items you dont plan on reselling. Dont get us wrong, we love toys and shiny things as much as the next person, but from an investment standpoint, they arent going to bolster your financial portfolio. Good debt isnt something to worry about financially, and can actually be a great asset if used correctly.
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How To Use Home Equity To Buy Rental Property
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You can unlock the equity in your home to help finance the purchase of rental property. To do so, youll need to take out a home equity line of credit or home equity loan on your home and use the money toward the down payment on the rental property. Under favorable circumstances, the rental property will generate sufficient income to pay all expenses plus provide you enough earnings to make the transaction worthwhile.
