As soon as I realized that my personal financial picture was a little bleak, I started thinking about taking out a personal loan. I wasn't really looking forward to going into debt, but I knew that if I wanted to solve a few short-term problems, a loan would be the way to go. I talked with a few of my local financial institutions to get a good idea of what they could offer me, and then I sat down to go over the paperwork. It was incredible to see how much money I could save by securing a lower interest rate. Check out my blog for more information about loans.
Rising home prices have left many homeowners with a large amount of equity in their homes, and you can make use of this equity with a home equity loan. A home equity loan is a type of secured loan that uses your house as collateral. Lenders will loan you money based on the amount of equity that you have, making it a very convenient way to get access to a large amount of money that's otherwise locked in your equity in your home — it's difficult to turn this equity into cash without selling your home or using it as collateral for a loan.
You can use the money you receive from the loan for anything that you wish, and one potential use is to purchase an investment property with it. This is an aggressive investment strategy that uses your equity to establish cash flow in the form of monthly payments you receive by renting out your investment property. To learn the advantages and disadvantages of using a home equity loan to buy a rental property, read on.
Advantages of Using a Home Equity Loan to Purchase an Investment Property
The biggest benefit of using a home equity loan to make a down payment on an investment property is that you don't need to spend any of your own money, which frees it up for other investments. When home prices begin to skyrocket, many homeowners find themselves with most of their assets tied up in their home equity, due to them rising faster than other investments. Purchasing a rental property with the equity gives you a stable passive income, which diversifies your investments.
Another benefit of using a home equity loan to purchase an investment property is that you're often able to pay down a significant part of the mortgage if you have a sizable amount of equity in your home. Paying more than the required down payment reduces the principal of the mortgage, which results in lower monthly mortgage payments. When you're purchasing a home to rent out, having very low mortgage payments is a major benefit — you're able to put more of a tenant's monthly rent payments into your own pocket rather than using it to pay the mortgage on the home.
Disadvantages of Using a Home Equity Loan to Purchase an Investment Property
The biggest disadvantage of using a home equity loan to purchase an investment property is that it increases your exposure to the real estate market. When you have a mortgage on your current home and a mortgage on your new investment property, you risk going underwater on both mortgages if the real estate market crashes. This occurs when property values drop below the amount you owe on the mortgage, and it means that your real estate debts are now higher than your real estate assets.
You'll also have to pay back your home equity loan in addition to paying off your two mortgages, which increases your debt burden and makes you more susceptible during an economic downturn. If you lose your job and can't make the payments on your loan, the lender can force you to sell your home in order to pay it off. While the fact that these loans are secured by your home means that the interest rates are lower than unsecured loans like personal loans, you'll need to make sure you're able to pay the loan back in order to avoid losing your home.
Overall, using a home equity loan to purchase an investment property is an aggressive investment strategy that can turn the equity in your home into monthly cash flow in the form of your tenants' rent payments. It's a risky strategy because it increases your exposure to the real estate market, but rent payments are a passive form of income that can help pay off the remaining mortgage on your investment property. If you have a substantial amount of equity in your home and you think that using it to purchase an investment property is the best option for you, contact multiple home equity loan services, like LincOne Federal Credit Union, and ask them about how much they're willing to offer along with the interest rates that they charge in order to find the best deal.
Share24 March 2022
