The idea of using an investment property to build wealth for the future is not revolutionary, but starting this process can be intimidating for those who are unsure of how to find the necessary line of credit. Between mortgages, purchasing costs, maintenance, and other expenses, securing an investment property can seem more costly than it is worth—especially if you already have a home of your own. Home equity loans are an excellent and financially sensible solution to this issue. After all, equity does nothing when it sits locked up in your home, so why not put it to work on getting an investment for your future?
Deciding Between Home Equity Loans or Home Equity Lines of Credit (HELOC)
There are two main ways of extracting the equity from your home. The first is a simple home equity loan, also known as a second mortgage. This method provides you with a single lump sum drawn against the value of your home. Since a home equity loan comes in this large form, it is best suited for when you are trying to purchase an investment property or for similarly large transactions. Keep in mind that you pay interest on the entire loan amount, regardless of how much of the funds are left unused.
A HELOC is a different take on the loan process. Once you secure a HELOC, you will be provided with a sort of credit card that allows you to draw against the equity of your home. The main difference between a home equity loan and a HELOC is that, with a home equity line of credit, you are only paying interest on the amount you actually spend. This makes a HELOC more suitable for situations where you are paying periodic sums, such as when you are performing renovations on an investment property to increase its value.
Investing in Real Estate with Home Equity
Buying an investment property is the same as with any other house—only the motivation and use the property will be put to is different. Another thing to keep in mind is how the amount you draw from your home’s equity will relate to the expected returns from the new property.
When assessing an investment property, it helps to think of the cash flow it can produce as a form of interest you are earning on your initial payment. If you take out $20,000 through a HELOC to make a down payment on a property that earns $300 per month, you have effectively made an investment that generates 18% interest before correcting for the HELOC interest rate.
Other Benefit to Investment Properties
One of the key benefits to using home equity to buy an investment property is the ability of your new asset to appreciate in value. Real estate goes up and down like any market, but properties still appreciate more steadily than most other forms of investment. This means that the 18% interest described above could grow to 20%, 22%, 24%, or more over the ensuing years.
A Local Source for Home Equity Loans and HELOC
LUSO Federal Credit Union is a member-owned, not-for-profit financial cooperative dedicated to providing its members with quality financial services and products. We at LUSO pride ourselves on serving the financial needs our members and can provide home equity loans in Springfield, Westfield, and Hampden County, Massachusetts.
Feel free to contact our Ludlow branch toll free at 1-844-LUSO-FCU or our Wilbraham branch at 1-800-808-5876.