Using Your Home Equity To Purchase A Property To Flip
If you're looking for a source from where to get funds to buy an investment property, the answer may be just in your own home. Did you know that your home equity can be used to pay for a new property? This is a ready and quick source that will allow homeowners as well as real estate investors such as home flippers to keep their savings and other investments.
Home equity refers to the balance from the fair market price or appraised value of your home minus the balances of mortgages or liens against the property. For instance, if your home is worth $180,000 and you have a mortgage balance of $100,000, your available equity is $80,000. Additionally, the interest on a home equity loan may be tax deductible.
The advantages
Using your home equity to buy another property offers several benefits. You can gain big savings if you make a down payment of more than 20 percent on your second property. This is because you will no longer have to pay for private mortgage insurance.
With your home equity available any time, you can purchase a second or investment property any time you wish. You won't have to wait for your savings to grow because you can take action right away.
Another advantage is that by being a homeowner, you may avail of low interest and tax deductions in financing the purchase of another property.
In cases when the second property being purchased is meant as a gift for children, taxes may even be avoided either totally or partially. Check your tax advisor concerning the taxes involved in such gifts.
For home flippers, home equity proves to be very useful as they can use it for various purposes. Real estate investors can definitely use the cash to purchase a property and do some improvements before reselling it. The upgrades will then improve the home's value and ready for reselling.
Loan vs. line of credit
Many homeowners prefer to use a home equity loan in purchasing a second or investment property. A home equity loan can also be used to refinance a homeowner's existing mortgages in order to avail of lower interest rates. Apart from the interest, the monthly payments can also be reduced. A homeowner may even avail of a bigger loan amount if he or she has already built up a considerable amount of equity in his home, which is really a big benefit.
However, there is another option available which is applying for a home equity line of credit, also known as HELOC. This is very possible especially if your home equity is sizeable enough. With a line of credit, you have more options available such as paying for the down payment of your investment property, home improvements and other expenses. In addition, you can enjoy tax deductions making the cost of your money very low. And with a HELOC, the interest charged is only on the funds that you have actually withdrawn from your credit line.
Before you start considering using your home equity, experts advise to always do some research. Weigh the advantages and disadvantages and assess your needs as well as your financial capabilities. Being prepared and knowledgeable is an ideal attitude that every real estate investor should keep.
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