Refinancing Vs. Home Equity Loans
Updated: Apr 23, 2020
Do you own a home and want to begin investing in real estate but don't have the extra funds?
Did you know that you can leverage your current home to help get you started?
If this all sounds new to you, I think you should keep on reading.
Today's post is about how refinancing or a home equity line of credit can get you the funds you need to start investing in real estate.
First, let's define the two:
Refinancing is the process of replacing an existing mortgage with a new loan. Refinancing grants you access to cash and leverages the equity of your property. The max loan amount of the property value that banks let you pull out generally ranges between 70-80%. This leaves you with 20-30% equity built into that property.
A home equity line of credit is basically a credit card attached to your house. You'll get a bank account with your line of credit in it & your mortgage will stay the same. You won't have to start making payments on this line of credit until your borrow against it. The amount that you can borrow usually is limited to 85 percent of the equity in your home. The actual amount of the loan also depends on your income, credit history, and the market value of your home.
Both options have pros and cons, but it's important to take them into full consideration before deciding which option is best for you.
You could end up with a better mortgage rate - if your mortgage currently has a high-interest rate, refinancing your home could possibly lower it.
Put you in the position to clean up your credit so that you're able to invest in real estate.
If your credit is already good, you're able to use the money you get from refinancing as a down payment for a rental property.
Your mortgage payment will be higher.
You're using your home as leverage, if you don't pay the loan back you will lose use your home.
HOME EQUITY LINE OF CREDIT
Your mortgage payment does not increase.
You don't pay the money back until you borrow against it.
The money is due at a later date.
Again, you are leveraging your home, if you renege on payments you can lose your property!
If you plan on utilizing either method to obtain some extra funds I stress to you the importance of having a plan! Please keep in mind, that you are leveraging your home with these two options. If you don't have concrete plans to fix your credit or invest the money you're borrowing back into real estate I DO NOT recommended using your home as leverage.
If you don't have a solid plan for investing I recommend reading my last post Breaking Down the BRRRR Method. It's my breakdown on the universal blueprint to real estate, and it's how I went from 0 properties to over 20+ in a short amount of time!