Using Equity in Your Home

Your home is an untapped source of money for wealth creation.

Haven’t thought of it that way?  You likely put down a down payment of 5 to 20% (or more sometimes), and regularly make your payments every month.  Over the years, you build equity in your home.  Most people don’t think of tapping that equity for wealth creation, but it can be done and sometimes very successfully.

We are living in a time of historically low interest rates.  To make the environment even more beneficial to the home buyer, many properties have declined in value over the last five years, sometimes dramatically.  Now is a good time to get into the housing market, especially if you want to own investment property.

If you don’t have the cash up front, you can tap into the equity you already have in your existing home.  What are the benefits of doing this?

  1. Immediate access to the home buying market.  Rather than waiting until you have saved money for a down payment, you can use the equity in your home to buy a new property.  Use a mortgage calculator to determine how much home you can afford based on the equity in your existing home.  You may be surprised at the size and quality of investment property you can afford.
  2. You start a positive domino effect.  If you are interested in owning several investment properties, you can use the eventual equity in your first investment property to buy your second one.  Continue this process for a number of years, and you will be able to buy several investment properties.
  3. Reap the tax benefits.  Many of your housing expenses such as interest on the loan, repairs and other expenses can be claimed when you file your taxes.  A mortgage calculator can give you a rough idea how much interest you will be paying monthly on your house loans so you can evaluate the benefit of investment properties from a tax standpoint.

While there are many benefits to tapping the equity in your home, you would be remiss to not consider the drawbacks.

  1. Interest rates may increase as would your monthly payment.  If you take out a loan with an adjustable rate mortgage such as an ARM, realize that because interest rates are so low right now, the only way they will likely go in the future is up.  Can you afford the change in payment that comes with increased interest rates?
  2. The property may decline in value.  If your investment property declines in value, selling it without suffering a loss can be difficult.  That loss can represent the loss of equity in your primary residence.
  3. Investing your home’s equity in an investment property can be a spring board to wealth creation.  Do so carefully though, because you are putting your primary residence at risk should you be unable to make your monthly payments or the property declines in value significantly.

3 Responses to “Using Equity in Your Home”

  1. Geri 7 April 2013 at 8:08 am Permalink

    If somebody used the equity within their home to obtain a mortgage (home was compensated off, aside from $30,000, then home was refinanced having a $200,000 mortgage with $160,000 in cash likely to homeowner, $30,000 to repay the prior mortgage), is that this mortgage qualified for mortgage loan modification? Or are just financial loans which were accustomed to really buy a home qualified?

  2. Moises 1 June 2013 at 5:03 am Permalink

    i wish to open a house equity credit line. i’ve 100% equity within my house and a very good credit score. i’m thinking about moving, but want to buy another house first, and then sell on my current house (which may cost a greater cost compared to one i’d buy).

    basically make use of the equity line to purchase a home, would the financial institution permit me to market my current house and eliminate them in the closing? type of a bridge loan with no costs.

  3. Vida 4 June 2013 at 4:23 pm Permalink

    I must buy a good investment property while using equity within my present home,without needing to sell my present house as it is within an rising area. Any advice could be much appreciated.

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