If you are looking for ways to fund your next investment, you may have more options than you think. The cash you need may very well be sitting inside of your real estate portfolio. With real estate values rising, there is a chance that you have much more equity in your property than you may have thought. If you have a good payment history and a strong loan application, there are a few different options for taking cash out of your property without selling. Between a home equity line of credit, a home equity loan and a loan refinance, all the equity you need may be readily available. That said, it is entirely possible to fund your next deal with equity that has already been established.
Equity is simply the difference in the value of your property and what you owe on it. The two ways to increase equity are to either lower the balance that you owe and to increase the value. If you bought in the last few years and put work into the property and haven’t checked on the value, it may be a lot higher than you think. Also, if you have made an extra mortgage payment or two a few times a year, your balance can be greatly reduced. The first step is to know exactly what you owe on all your liens. Subsequently, you will want to come up with a realistic estimation of the value. Ask your realtor to send you over some recent sales or comparables to give you a better idea. Most investment loan options will require you to have at least 25% equity or a loan to value ratio of 75 percent.
If you are satisfied with your current loan interest rate and want to keep that payment, you should look at taking a second mortgage. Doing this will keep your first lien in place, but add a second lien behind it. The two options you have under this scenario are a home equity line of credit and a home equity loan. A home equity line of credit, or HELOC, is a variable loan that is based on an index that adjusts monthly. You have the option of paying only the interest on the money you use for the first ten years, followed by ten years of principal and interest repayment. This interest payment option may seem risky, but it is one of the true benefits of a HELOC, in that you don’t have to make a large payment every month.
The biggest difference in a HELOC and a fixed second loan is that you only repay what you use on a HELOC. If you take a line out for $75,000 but only use $25,000 of it, that is the number that will be used for your monthly payments. On a fixed second loan of $75,000 you are repaying that full amount back from the first month of the loan. A HELOC works much like a credit card in that you receive a card or a checkbook and can take out money at your digression against your line amount. Your repayment rate is based on the current prime rate plus the index designated by the lender. If you have used a HELOC in the past five years, you know that the prime rate plummeted after the mortgage collapse and has been at this level for some time. The flip side is that it can adjust on any given month, but that should take months – if not years, to happen.
Not every borrower wants to have an interest only option and would prefer to know what their payment will be every month. If you are like this, you should opt for a fixed second mortgage over a variable line of credit. With this, you will know exactly what you are paying for the next 20 years and can base your business around it. You can still get the same amount of cash, but it will be issued to you in one lump sum at the closing. It is difficult to get more after you close. If you think you need or want more, you should take try to get it all in one shot.
The last equity option you have is a cash out refinance of your existing first mortgage. This is probably the last resort – only because interest rates have been so low the last few years that any new loan would probably be an increase in rate. Cash out refinances on investment loans require excellent credit, strong loan to value ratios and you may be capped in the amount of cash you can receive. If you use a portion of the money to pay down or pay off debt, it can lower your total debt obligations and make this a viable option. Either way; if you have equity and have a chance at a great deal, you can explore refinancing into a new first mortgage.
The greater the amount of equity you have, the more options that are on the table. Instead of selling and cashing out, you can tap into equity to grow your business. You have multiple options. Discuss them all with your bank or mortgage broker and figure out which is best for you.
