Big Vs Small: Equity Investment House Rules

Home equity is the difference between the amount owed on a mortgage and the current market value of the home. It is an asset that can be borrowed against to meet financial needs, such as paying off high-cost debt or funding large expenses. When investing for equity, individuals have the option to choose between big or small houses. While bigger houses may offer more space and potentially increase in value over time, smaller houses can be more affordable and provide higher returns on investment. It is important to consider factors such as financial situation, future plans, and risk tolerance when deciding between investing in a big or small house for equity.

Home equity loans

Home equity is the difference between the amount you owe on your mortgage and the current market value of your home. It is an asset that you can borrow against to fund large purchases or investments.

There are two main ways to borrow against your home equity: a home equity loan or a home equity line of credit (HELOC).

A home equity loan is a one-time, lump-sum loan that uses your home equity as collateral. It usually has a fixed interest rate and a regular monthly payment, with terms of up to 30 years. To qualify for a home equity loan, you typically need a good to excellent credit score, sufficient equity in your home, and a low debt-to-income ratio. The amount you can borrow depends on factors such as your income, credit history, and the amount of equity in your home. Home equity loans can be used for various purposes, such as home remodelling projects, debt consolidation, weddings, education, and even buying a second house.

On the other hand, a HELOC is a revolving line of credit that allows you to borrow up to a certain credit limit over a specific period. It usually has a variable interest rate and works similarly to a credit card, where you can borrow, repay, and borrow again as needed. HELOCs often have a 10-year draw period, followed by a repayment period of around 20 years. There are typically no closing costs, application fees, or annual fees associated with HELOCs.

Both home equity loans and HELOCs can provide access to funds for various financial needs, but it is important to carefully consider the risks and benefits before taking on additional debt. It is also crucial to compare offers from multiple lenders and understand the terms and conditions before making a decision.

Home equity lines of credit (HELOC)

A home equity line of credit (HELOC) is a revolving line of credit that allows you to borrow against the equity in your home. It is similar to a credit card in that you can continuously borrow up to an approved limit while paying off the balance. The main difference is that a HELOC is secured by your home, which acts as collateral for the line of credit. This means that if you can't make your payments, the lender could foreclose on your home.

To qualify for a HELOC, you need to have available equity in your home, meaning that the amount you owe on your home must be less than the value of your home. Lenders typically allow you to borrow up to 80-85% of the value of your home minus the amount you owe. They will also consider factors such as your credit score, employment history, monthly income, and monthly debts when evaluating your application.

During the draw period, which typically lasts for 10 years, you can borrow money from the HELOC and make interest-only payments. After the draw period ends, the repayment period begins, during which you can no longer borrow money and must make both principal and interest payments. The repayment period typically lasts for 20 years.

HELOCs usually have variable interest rates, which means that the interest rate can change from month to month based on an index and a margin. However, some lenders offer a fixed-rate option, which allows you to convert a portion of the variable-rate balance to a fixed rate, providing more stable and predictable payments.

When deciding whether to get a HELOC, it's important to consider your financial situation and goals. HELOCs are often used for large expenses, such as home repairs, renovations, or consolidating higher-interest debt. The interest on a HELOC may be tax-deductible if you use the funds for certain purposes, such as home improvements. However, taking out a HELOC increases your risk of foreclosure if you can't make the payments, so it's not recommended if your income is unstable or if you can't afford higher interest rates.

Using home equity to invest

Home equity is the difference between the market value of your property and the amount you still owe on your home loan. For example, if your home is worth $400,000 and you still owe $220,000, your equity is $180,000. Equity can be used as security with most lenders, allowing you to borrow against it to fund large purchases.

How to Calculate Your Equity

You can calculate your equity by subtracting the amount you owe on your mortgage from the current market value of your home. For example, if your home is worth $300,000 and your mortgage balance is $50,000, then your equity is $250,000.

Using Equity to Invest

If you have built up a significant amount of equity in your home, you may be able to use it to invest and build wealth. You can convert your equity into cash through a sale or a loan, which can then be used for various investments such as stocks, bonds, or real estate. However, it's important to note that investing with borrowed funds can be risky, especially if you're not a financial professional.

Things to Consider Before Using Equity to Invest

• Risk of losing your home: When you borrow against your home equity, you are putting your home up as collateral. If you fail to make payments, the lender can take your home.
• Potential for monetary losses: Investments can go up or down, and you may end up with a net loss if your investments don't perform well.
• Interest rates and borrowing costs: The interest rate on home equity loans and lines of credit is typically lower than credit cards and personal loans, but you need to consider whether your investment returns will be higher than the borrowing costs.
• Impact on credit score: Taking out a home equity loan can affect your credit score, which may impact your ability to get approved for future loans.
• Alternative investment options: There are other ways to invest without borrowing against your home equity, such as margin trading, personal loans, or a cash-out refinance.

Home equity investment

Home equity is the difference between the amount owed on a mortgage and the current market value of a home. This can be calculated by subtracting the amount still owed on a mortgage from the property's market value. For example, if a home is worth $400,000 and you still owe $220,000, your equity is $180,000.

Home equity can be used as security with most lenders, allowing you to borrow money against it to fund large purchases. However, not all equity is available to borrow against. Lenders will typically lend 80% of the value of a home minus the remaining debt. This is considered the usable equity.

There are several ways to borrow against home equity, including home equity loans, home equity lines of credit (HELOC), and cash-out refinancing. Home equity loans are often used to finance large expenditures, such as home repairs or college tuition, and usually allow borrowers to receive a lump sum of money at a fixed rate over a fixed period. A HELOC is a revolving line of credit, similar to a credit card, that allows borrowers to continuously borrow up to an approved limit while paying off the balance. Cash-out refinancing involves taking out a new mortgage that is larger than the amount owed on the existing mortgage and using the remaining money as needed.

Another option for accessing home equity is through a home equity investment (HEI). An HEI is an agreement that gives you cash from your home equity today in exchange for a share of your property's future value. There are no monthly payments or interest charges with an HEI, and the credit and income requirements tend to be less stringent than with other home equity products. However, the trade-off is that you will need to share a portion of your home's future appreciation, which could mean repaying substantially more than you received if your property value increases significantly.

The process of obtaining an HEI typically involves prequalifying and completing an online application, agreeing on an investment amount, and then receiving a lump sum payment. The investor will determine the current value of the home and make a valuation adjustment to protect themselves in case of depreciation. The HEI agreement will specify how much cash the borrower will receive upfront, how much equity will be shared, and the repayment terms. At the end of the term or when the borrower chooses to repay the HEI, they will pay the investor their share of the equity based on the home's current value.

Overall, home equity investments can be a good option for those who need access to cash but cannot handle the monthly payments associated with a home equity loan or do not qualify for a HELOC due to credit score requirements. However, it is important to consider the potential drawbacks, such as the risk of losing out on significant wealth if the home appreciates in value.

Building equity

Make a Large Down Payment

When buying a home, aim to make as large of a down payment as possible. This will give you immediate equity in the property. For example, if you purchase a home for $300,000 and make a 20% down payment, you'll have $60,000 in equity from the start.

Choose the Right Mortgage Type

Avoid interest-only loans, where no principal is paid off until a lump sum is required. Instead, opt for a mortgage that helps you build equity consistently by making payments that include both interest and a portion that reduces the outstanding principal.

Stay in Your Home

The longer you stay in your home, the more likely you are to see an appreciation in its value, which adds to your equity stake. Even if you don't make any improvements, simply owning the property over time can increase its market value.

Make Home Improvements

Renovations and upgrades can boost the market value of your home. However, be mindful of the costs involved and consider whether the improvements will actually increase the value. Some improvements may be more effective than others in building equity.

Make Larger or More Frequent Repayments

If your loan allows, consider making larger or more frequent repayments to reduce your loan balance faster and build usable equity. Just be aware that fixed-rate loans may charge you a fee for changing your repayment amount or schedule.

Make Lump-Sum Payments

If you come into a large sum of money, consider using it to pay down your mortgage. This can help you build equity faster, but be sure to check if this option is permitted by your specific home loan.

Link Your Transaction Account to an Offset Facility

By linking your transaction account to a 100% offset facility, you can reduce the amount of interest you pay on your existing loan. This, in turn, will help you build equity in your property faster.

It's important to remember that building equity takes time and a well-thought-out strategy. Consult with a financial expert or advisor to determine the best approach for your specific situation.

Frequently asked questions