Using Home Equity Loan To Buy Investment Property

What Is A Heloc

Also known as a Home Equity Line of Credit, a HELOC is a second mortgage on a rental property that works similar to the way a rotating line of credit on a credit card does. The lender sets the credit line dollar amount using the rental property as security. The borrower can draw on the line of credit as needed, repay the balance over time, then use the credit line again.

In most cases a HELOC has a draw period such as 5 or 10 years during which the borrower can draw on the credit line and make monthly interest-only payments.

When the draw period expires, the borrower must make monthly payments of principal and interest until the outstanding balance is repaid in full. The repayment period of a HELOC varies from lender to lender, but may last up to 20 years.

Lenders normally set few restrictions on how the funds from a HELOC can be used. Some examples of how real estate investors use a HELOC on a rental property include:

• Updating and improving an existing rental property to obtain a higher monthly rent
• Making capital repairs such as replacing the HVAC or installing new flooring
• Forcing equity appreciation and increasing property value by converting an attic or basement into additional rentable square footage
• Paying off the outstanding mortgage on another rental property
• Using funds from a HELOC as the down payment for an additional rental property

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Cons Of Using A Home Equity Loan To Buy An Investment Property

There arent any additional requirements for using a home equity loan toward an investment, although there are some unique considerations you should take into accountespecially if you plan to use the propertys income to cover your payments.

Youll need to make sure that the property youre interested in purchasing will actually generate income, says Alex Shekhtman, CEO and founder of LBC Mortgage.

To do this, consider working with a real estate agent. They can help you understand local market conditions and ensure youre investing in an in-demand area.

You should also take into account the extra costs that come with an investment property, including maintenance, cleaning, restocking supplies, and, if youre hiring a property management company, the cost of those services.

Youll want to weigh the short-term aspects of the current buying environment with the long-term potential prospects of the property, Black says. Youll also want to figure out a budget to make sure you have cash on hand for repairs or unanticipated vacancies or slow seasons.

Some other drawbacks of this financing strategy include:

You Are Leaving Yourself Vulnerable To Shifts In The Housing Market

All homeowners are technically vulnerable to these shifts, but by owning two properties, you are essentially doubling your potential risk to changes in the housing market. If either homes value lessens, you may end up owing more on your mortgage and home equity loans, which can spread some homeowners too thin.

And if you default on the loan, you could potentially lose both your primary and secondary properties, as both are held as collateral. You should also note that reduced market values could affect your ability to resell the investment property.

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How Can You Access Your Hidden Wealth

If youre planning to use equity to buy an investment property, youll need to get a property valuation report first. This is to find out how much equity you have in your home. If youve lived in your home for more than five years, you probably have considerable equity in it.

Its important to note that when it comes to equity, theres accessible equity and theres useable equity.

Accessible equity is the amount you can potentially access. Using our previous example, if your home is currently valued at $600,000 and you have $400,000 outstanding mortgage on it, your accessible equity is $200,000.

However, the banks only lend to 80% of the current valuation less than the current mortgage. This is also known as your useable equity.

So the amount you can borrow against then becomes: $600,000 x 80% $400,000 = $80,000

As you can see, its significantly lower than the $200,000 available equity, but its still a hefty amount that you can use to fund your deposit.

When assessing your application banks will take into account your income, the number of children you have, current debts and many other factors to determine the amount of equity they accept.

Typically, lenders can accept up to 80% of the equity on an existing property. If this amount can sum up to 20% of the value of the investment property then you can avoid paying Lenders Mortgage Insurance .

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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Figuring Out What You Can Use

Generally, you will not be able to take out 100% of your home equity. Most loan programs limit borrowers to 80% of the value of their home. In the above example, this would mean that you could have a maximum of $240,000 in outstanding mortgages. Since you have $100,000 in a first mortgage already outstanding, that leaves $140,000 available for a home equity loan.

Cons Of Using A Home Equity Loan To Buy A Second Home

Despite the strategys benefits, using home equity to buy a second home isnt without risk. For one, these loans add a second monthly payment on top of your mortgage. They also use your homethe place you and your loved ones liveas collateral, so if you dont stay current on payments, the lender can foreclose on your house.

If you can’t make both payments, you will fall behind very quickly, says Jim Black, chief lending officer at InstaMortgage and an advisor at Calque Lending. You can lose everythingliterally.

Other drawbacks include:

• It puts your primary home at risk of foreclosure if you cant make your payments.

• Home equity loans add a second monthly payment, which could strain your household budget.

• It could mean owing more than your homes worth if home values decline in your area.

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How To Draw Equity Out Of Your Home

Thinking of renovating one of your properties, or perhaps investing in a new one to grow your portfolio? Considering the usable equity accumulated in your original property is a savvy way to help finance this venture.

A home equity loan is an excellent alternative to a personal loan, or even a line of credit because the interest rates are lowerâand you can use the money for just about anything you wish.

Our specialists at The Mortgage Agency have broken down everything you need to know on how to draw equity out of your home.

What Is The Brrrr Method In Real Estate How To Obtain Private Capital Funding

Multilingual REI Capital LenderInvestor | FL Licensed Agent | Entrepreneur

The BRRRR method is a popular real estate investing strategy that stands for “Buy, Rehab, Rent, Refinance, Repeat”. The goal of this method is to purchase a property, fix it up , rent it out, refinance the property to pull out your initial investment, and then repeat the process with a new property.

The first step in the BRRRR method is to find a distressed or undervalued property that has the potential to be renovated and rented out. Once you’ve found a suitable property, you’ll need to secure financing to purchase it. One way to do this is by acquiring private money capital.

Private money capital is funds provided by private investors, rather than traditional financial institutions such as banks. These investors may be individuals, family offices, or even a group of friends who are looking for a high-return investment opportunity.

To secure private money capital for your real estate deals, there are a few steps you can take:

Here are a few things that private money lenders may require:

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What Is The Homestart Finance Shared Equity Option

It is a secondary loan from your equity partner or lender, South Australias HomeStart Finance. You can get a home loan of up to 25% of the purchase price or property valuation, whichever is lower. It is capped at $200,000 and cannot exceed your primary home loan. Your repayments will be calculated on the remaining portion of the purchase price at least 75%. Instead of charging interest, your equity partner will share your gains and losses when you sell your home. Alternatively, you can pay off the shared-equity portion of your loan and own full equity in it, by making lump-sum payments of $10,000 or more.

This arrangement is also known as a shared appreciation loan. Thats because if you sell or refinance the home, or buy out the lenders share of the equity, you will be sharing the increased value of your home with the lender. If your home value decreases, the lender will share losses only if you sell it.

What Is An Investment Property Loan

Investment property loans are for a single-family, townhome, condo, or multi-unit property that has been purchased with the intention of earning a return on the investment, either through rental income, future resale or both.

For those interested in buying an investment property, Pennymac offers loans to fit unique investor needs. As an option, you may be able to use your current home equity to finance buying an additional property. Give us a call to see what your options are or apply online.

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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.

Investing With An Equity Loan

Your home equity can be a financial safety net in case of job loss or a medical emergency. If you have an emergency fund then you may want to use your equity for investment. Real estate can be a sound investment for an equity loan, especially if it provides rental income that covers the loan payments. Before taking on additional debt, make sure you understand the risk involved. Missing payments on your home equity loan puts you at risk of losing both your primary home and your investment property. If youve analyzed the risk and decide to proceed, using a home equity loan to finance the down payment or the entire purchase price is no different than using any other source of money to buy real estate.

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Is It A Good Idea To Use Home Equity As A Down Payment For A Second Home

You should only finance the purchase of a second home with a home equity loan if you can afford multiple mortgage payments over the long term. An investment property can generate income and pay for itself when managed responsibly, but when it comes to being a landlord there will always be economic factors involved that are out of your control. If, for example, a renter moves out, can you afford to cover the mortgage payment on your own for a few months while you find a new tenant? If you lose your job during a time of economic uncertainty, do you have enough savings to stay current on your monthly payments until you find a new role? These are factors to consider carefully when your primary residence is on the line.

“Whether your home is paid off or not, tapping home equity isn’t free money and it’s not the same as going to the ATM and withdrawing money from your account,” says Greg McBride, chief financial analyst for Bankrate. “This is borrowing, which must be repaid with interest, and it puts your single largest asset on the line in the event of default. That doesn’t make it a bad option, just one to go into with both eyes open.”

In addition to the expense of a down payment and new monthly mortgage payment, don’t forget about all of the other costs associated with buying a new home. You’ll need to furnish the home, as well as take care of its maintenance and pay property taxes.

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, its 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.

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How Home Equity Loans Work

Home equity loans let you borrow against the value of your home that you own outright, and convert it into a lump sum, cash payment. You can then use those funds however you wish.

Getting a home equity loan works much like getting a traditional mortgage. You will fill out an application, submit financial documents like bank statements, pay stubs, tax returns, and W-2s and then close on your loan. One way that home equity loans do differ from applying to a traditional mortgage: You may not owe closing costs, though it depends on the lender you choose.

To qualify for a home equity loan, youll usually need:

• A 680 credit score or higher

• A debt-to-income ratio of 45% or less

• At least 10% to 20% equity in your home

Once approved for a home equity loan, youll receive the funds a few days after closing. You will begin repaying the loan back immediatelyvia fixed monthly payments.

Know Your Credit Score

Lenders will pay special consideration to an investors credit score when evaluating a HELOC, as with most other sources of capital. After all, a credit score is a common indicator of whether a borrower is a risk. As a general rule, the better the credit score, the more likely an investor will qualify for a HELOC. However, it should be noted that there isnt a universal standard for an acceptable credit score different lenders have different criteria. What one lender may consider a good score, another may consider poor or even risky. Traditionally, borrowers will want to boast a credit score of at least 740 if they want to tip the scales in their favor, but again, everyone is different.

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Where Can I Find A Lender That Offers Home Equity Loans Or Helocs On An Investment Property

There are several lenders that offer primary residence home equity loans and HELOCs, which you can use to purchase an investment or rental properties or cover expenses on them.

Some may also allow you to take out these loans on existing investment properties, but not all. If this is the type of financing youre seeking, make sure to double-check with the lender youre considering before moving forward.

Here are a few home equity loan and HELOC lenders you might want to consider: