Property owners, especially those with substantial equity in their residential or commercial properties, can leverage that equity to take advantage of investment opportunities. Home equity loans, also known as second mortgage loans, are a popular source of financing for homeowners, as home equity values can potentially amount to hundreds of thousands of dollars. Also, most home equity loans carry much lower interest rates than standard business or personal loans, regardless of whether or not the property is paid off.
Home Equity Appraisal
The first step in processing a home equity loan is to get an accurate appraisal of the property. The lender will order a licensed appraiser to carry out the appraisal, and the borrowers are typically required to cover the appraisal costs. The appraisal is a vital part of calculating the property's loan-to-value ratio. This ratio is a way of showing how much the homeowner still owes on the current mortgage. The ratio also determines if a homeowner qualifies for the equity loan.
Home Improvement Loan
One of the most popular ways to leverage real estate equity is the home improvement loan. Homeowners use these loans to repair, improve and upgrade features and fixtures around the home. The aim of these efforts is to improve the home's curb appeal, functionality and resale value. For instance, a homeowner can leverage the equity in his home to upgrade kitchen fixtures, replace insulation and install power-saving electrical appliances. Each of these projects can save money on monthly bills and increase the home's resale value.
Income Property Investment
Instead of choosing to improve a current property, some home equity borrowers use their funds to invest in income properties. Income properties can be residential or commercial properties that bring in regular rental income. With the right tenants and skilled management, the rental income from the property's tenants will cover the equity loan payments with the potential for a small profit. Over time, the equity stored in the income property can also be leveraged.
Retirement Funds and Other Investments
Homeowners can also use the proceeds from leveraging real estate equity to invest in other opportunities. For instance, homeowners can borrow against the equity in their homes at low rates, then invest the proceeds from those loans in tax-deferred retirement accounts. Investors can also place the proceeds into interest-bearing investments, including money market accounts, Treasury bills and corporate bonds. The interest payments from these debt securities can cover the loan payments and provide a profit.
- Financial Mentor: Is Leveraging Real Estate Equity A Good Idea For Retirement?
- Bank of America: The Home Appraisal Process
- MarketWatch: Boomers Turn Home Equity into 401(k) Funds
- SFGate: How Do I Leverage Real Estate Equity?
- U.S. Federal Trade Commission: Home Equity Loans and Credit Lines
- U.S. Federal Reserve Board: What you should know about Home Equity Lines of Credit
- First Rental Property: How to use leverage to buy your first rental property
Living in Houston, Gerald Hanks has been a writer since 2008. He has contributed to several special-interest national publications. Before starting his writing career, Gerald was a web programmer and database developer for 12 years.