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How to access equity in investment property

By using your home’s equity, you can potentially buy an investment property.

When it comes to investing in real estate, equity is a key concept to wrap your head around. The Successful Investor’s Michael Sloan explains what equity is, and how you can use it to your advantage.

What is equity?

Equity is the difference between the current value of your home and how much you owe on it.

For example, if your home is worth $400,000 and you still owe $220,000, your equity is $180,000.

The great thing is, you can use equity as security with the banks. This means you can borrow against your equity to fund life’s big purchases, such as:

  • extending your home
  • starting a business
  • buying a car
  • going on a holiday.

You can use also use equity to buy an investment property and get into the real estate game.

Total equity and useable equity

Banks will typically lend you 80% of the value of your home – less the debt you still owe against it. This is considered your useable equity.

Since the bank is lending you money against the value of your home, they won’t lend you the full amount. Put simply, if house prices dip, they don’t want an outstanding loan that’s worth more than your property.

Keep in mind that it’s possible to borrow more than 80% if you take out Lenders’ Mortgage Insurance (LMI).

How much can you borrow?

Using the example above, let’s say your home is valued at $400,000 and your mortgage is $220,000. Here’s the breakdown of sums:

  • value of your property – $400,000
  • value of your property at 80% – $320,000
  • minus your mortgage – $220,000.

This means your useable equity would be $100,000.

Learn how to estimate your property’s equity using the NAB app.

Using the ”rule of four"

When it comes to actually buying an investment property, it can be hard to know where to start.

But a simple rule of thumb is to multiply your useable equity by four to arrive at the answer.

For example, four multiplied by $100,000 means your maximum purchase price for an investment property is $400,000.

Why four and not five?

If you’re buying an investment property worth $400,000, the bank will lend against your future property just as they would against your existing home.

The banks will lend 80% (or $320,000) in this scenario, but the property costs $400,000. This leaves an $80,000 gap, which is your house deposit.

However, you also have to budget for purchase costs such as stamp duty, legal fees and more. This is approximately 5% of the purchase price – around $20,000 on a $400,000 property.

Therefore, the total amount of funds needed to purchase a $400,000 investment property is now $100,000 – an $80,000 deposit plus $20,000 costs.

Final tips

Even if you have plenty of equity, it’s not always a given that you can borrow against it. The bank will take into account several factors such as your income, your age, how many kids you have, and any additional debts.

Remember to play it safe. If you don’t have any funds outside your home equity, then it’s risky to use every last cent of your usable equity to invest in property.

You always need a buffer – back up funds in case things don’t go to plan. Even if it means you can’t invest for a while, it’s important to keep yourself protected.

Ultimately, using equity to buy an investment property can be a smart move. But before you get serious, it’s best to talk to your banker or broker.

Before you decide which strategy is best for you, talk to a professional. A financial adviser or an accountant is a good place to start.

Have you dreamed of buying an investment property, but don’t have a cash deposit? Don’t give up your dream! If you already own a home, the equity in your property could provide the key to launching your investment property portfolio.

What is equity? In short, it’s how much money you have tied up in your home: the difference between its value and your remaining mortgage.

For example, if your home is valued at $800,000, and you have $200,000 remaining on your mortgage, your equity in the property is $600,000. This is a sum that you can use against a mortgage on an investment property.

However, before you rush in, it’s essential to understand the difference between equity and useable equity – as, generally, you can’t borrow against your total equity. Also you need to understand that borrowing against your home to invest comes with inherent risks.

Calculating useable equity for an investment property

When you apply to borrow money from a bank or other financial institution, they look at several factors. One is the loan-to-value ratio (LVR) in relation to the property. This is the percentage of the property’s value you want to borrow.

In the example above, the LVR is 25%: $200,000 is 25% of $800,000

Traditionally, a bank will lend up to 80% LVR on the value of your property minus the debt owing, provided it thinks you can meet the repayments. In our example above, the breakdown would be:

— Property value: $800,000

— Debt owing: $200,000

— An LVR of 80%, minus the debt owing, equals $440,000 of useable equity.

Once you know how much useable equity you have, you can roughly calculate the purchase price you can consider for an investment property. A general rule of thumb is between three and four times your useable equity. But, of course, the amount a bank is willing to lend a customer varies on their individual circumstances.

A bank will analyse the ability of any would-be borrower to pay back the debt. It will look at an applicant’s income and their other financial obligations, such as credit cards, car loans, and other mortgages.

The lending criteria of banks also vary according to the state of the market and each institution’s internal risk assessment policies.

How to access equity in investment property

Boosting the equity in your home

If you want to boost the equity of your property, there are ways of increasing its market value. Typically, these involve adding value with renovations or landscaping.

Another way to increase your equity is to reduce the amount of debt on your property by paying it down as quickly as you can. Current interest rates are low, so it’s a great time to pay off as much of your home loan debt as possible.

As house prices continue climbing steadily upwards, home owners’ equity levels rise too. If you continue paying down your mortgage as your house increases in value, your equity will continue to grow.

However, the property market can be volatile, and house prices and demand for rentals can rise and fall in different areas at different times. So it’s essential to always do your research before making any investment, and to seek the advice of a financial expert.

Key considerations before purchasing an investment property

Before you choose to expand your property portfolio, make sure you have your finances in order. This includes asking yourself a number of questions to determine your maximum purchase price, and how much you’ll need in rental income to make the investment sustainable.

For example, ask yourself:

  • What is the average rental yield for homes in the area I am looking to buy?
  • If I need to drop the rent, will the rent still service the loan?
  • When property is in high demand, what is the highest amount of rent I can achieve?
  • If a tenant (commercial or residential) stops paying the rent or leaves at the end of their tenancy, can I afford to make the mortgage repayments while I try to find a new tenant?
  • Can I cover the costs of maintaining the rental property, rates, upkeep, etc

In good times, when capital gains are flowing and demand for rental properties is high, investing in property seems a safe bet. But no investment is risk free and it’s definitely not an investment to be made for quick, short-term gains.

Indeed, the bright-line property rule means that if you sell a residential property you have owned for less than five years you may have to pay income tax.

However, if you work through your finances, and do your research, investing in property remains a smart way to build a solid financial future on the existing equity in your home.

Buying an investment property? Canstar can help!

Whether you’re in the property market for an investment property, a first home, or are up- or down-sizing, if you need a mortgage, you need to talk to the experts. This includes lawyers, real estate agents and a mortgage lender. For the latter, let Canstar be your guide.

Not only can you compare mortgage rates for free on our site, we publish expert research into the best lenders in the market. To read why The Co-operative Bank, took out our award for Most Satisfied Customers | Home Loans 2020 click this link. Or to compare current mortgage rates, click on the big button below.

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How to access equity in investment property

RESIDENTIAL PROPERTY INVESTORS commonly release equity in their homes in order to invest in other property. But can you do the same with your Commercial property?

Equity in Commercial Property

It is possible for you to utilise the equity in Commercial property … but it is a bit more difficult and complex than with residential property.

Banks are more risk-averse to Commercial property funding than they are to the residential market. And they will want to have some measure of control over the use of funds — before releasing cash to you.

Unfortunately, non-bank lenders and private lenders are just as averse to ‘cash-out’ facilities against your Commercial property. Mainly because these facilities do not guarantee the desired return to investors.

So what should you do … if you have equity in your Commercial property and wish to invest further?

Two Ways you can Release your Commercial Equity

If you are looking to expand your portfolio of Commercial properties, access to funds is every bit as important as interest rates and costs . You can request a facility with some form of re-draw available.

That will allow you to pay down a loan and then draw on it again up to your limit.

If your bank or lender does not offer that facility, you may need to re-finance to a more flexible provider.

A bank will generally require some form of evidence of the purpose before releasing funds. But the level of information required will differ from bank to bank.

2. Lines of Credit

Does your investment requires easy access to credit (for example, you are a share trader)? Then you can consider a funder that allows a line of credit facility secured by a Commercial property.

There are a small number in the market and using them mean paying a higher rate on your debt.

When considering the most appropriate loan product, you need to look at the use of funds and the potential for profit through using this equity. And compare it to the cost of leaving the equity idle.

Relationship Management: Keep a Good Relationship with Your Bank

Banks are generally less flexible with allowing use of equity in Commercial property. Although, if your Commercial property loan is currently with a major bank, then ensure that you are maintaining a strong relationship with your banker.

Many changes have occurred in the mortgage sector over the last 10 years. But business banks are still largely run the old fashion way — through individual decision makers and relationships.

Bottom Line: You need to maintain a good relationship with your banker and make sure your loan is in good standing. Because you will stand a much better chance of getting assistance when you want to invest further.

Major banks will allow redraw facilities on certain products. But it is generally subject to sign off from your banker — so it pays to be nice to them!

HELOCs can be a great tool for real estate investors looking for additional capital. Here’s what to consider when getting a HELOC on an investment property.

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A home equity line of credit (HELOC) is a lending product that provides a loan based on the amount of equity held in a real estate asset. Typically, HELOC lenders will require the borrower to have 20% or more equity in the property already, which acts as security for the loan.

Traditional consumer personal loans have higher interest rates because they aren’t secured against anything. As a HELOC is secured against a property, the interest rate tends to be lower.

Because of this, HELOCs can be a great way for real estate investors to access funds. HELOCs on an investment property, done properly, can provide capital for future acquisitions or renovations. Here's an overview of HELOCs, the pros and cons of getting an investment property line of credit, and whether real estate investors should try to get in on the action.

What is a HELOC?

A home equity line of credit (HELOC) is a lending product that is secured against a real estate asset. Generally speaking, a HELOC on an investment property will give you a pool of money you can choose to access. This is an important distinction from a refinance, which would put all the money in your account at once.

With a HELOC, you will be given access to a certain amount of funds, but similar to a credit card, if you don’t spend it, you won’t be charged any interest. This gives investors a lot of flexibility to use or hold on to this capital and deploy it strategically.

As you pay off the balance, those funds will then become accessible to you again. For instance, if you use $50,000 from a $100,000 HELOC on an investment property renovation project, you will only be charged interest on $50,000, until it’s paid back in full, then you have access to the entire $100,000 again.

HELOCs generally have an expiry date of 10 or so years but can be easily extended or closed.

HELOC on an investment property example

Assumptions:

  • An investor owns a duplex with a market value of $500,000.
  • The current mortgage balance is $250,000.
  • Your lender allows for up to 80% LTV on a HELOC.

In this example, the real estate investor would have $250,000 in equity in their property. With a lender’s 80% LTV, that means they would allow the investor to borrow up to 80% of the value of the property.

The HELOC ceiling here would be at $400,000, meaning you could borrow on an investment property using a HELOC and access up to $150,000 as a loan ($400,000 LTV ceiling minus current equity). A HELOC could be issued in this scenario, which would give an investor access to capital.

There are a number of factors to consider when using a HELOC for a rental property, particularly the interest rate and fees.

HELOC interest rates: These tend to be lower than traditional consumer lines of credit due to the security behind the loan — the property. HELOC interest rates can vary greatly, the typical range is between 3-6%. According to Bankrate, the average HELOC rate as of December 2020 was 4.53%. One downside to HELOCs is the variable interest rates, versus a fixed rate typically seen on home equity loans. This can cause variability — to the upside or down — on repayment amounts.

HELOC fees: As with any lending product, there are fees associated with getting a HELOC on an investment property. These can include annual fees, closing costs, application fees, and so on. Generally, these can be taken from the HELOC itself so you aren’t out of pocket initially, but in the end, they will still require repayment.

Can you get a HELOC on a rental property?

Yes. Most lenders will give a HELOC on a rental property as long as the minimum equity requirements are met. For instance, if you have less than 20% equity in the property, then it will be difficult to obtain a HELOC no matter the usage of the property. Because this is a rental property and not a primary residence, the bank will have additional requirements to ensure risk is minimized.

Most lenders also require a higher credit score (720 minimum) for HELOCs on investment property. There will also need to be tenants and leases in place, sufficient cash flow from rental income, as well as some form of cash reserve.

Typically, because investors have to put down 20% or more on investment properties, this equity threshold is met and you simply have to adhere to the requirements of the lender.

The most common uses for an investment property HELOC are for renovations, high-interest debt consolidation, or new acquisitions. Instead of a refinance loan or selling a property, investors will oftentimes explore the HELOC option because it’s less burdensome in terms of paperwork.

HELOCs are also similar to home equity loans, except for a few key differences:

  • HELOCs typically have variable interest rates, versus fixed for home equity loans.
  • A home equity loan gives you a lump sum with a monthly payment, whereas a HELOC can be drawn as needed.
  • Repayment can be interest-only for HELOCs, whereas for a home equity loan it’s a set amount over a given period of time.

Refinance versus home equity loan versus HELOC: Simply put, a refinance loan gives you a lump sum with a new mortgage and terms, a home equity loan gives you a lump sum with monthly repayment terms, and a HELOC gives you access to a lump sum with various interest and principal repayment options.

How to get a HELOC on an investment property

If you currently use one bank for all your financing and banking needs, then it's best to begin here. It’s always wise to consult a professional mortgage broker who specializes in investment properties to get their input on the best action plan for a HELOC on an investment property.

You will be asked to submit an application with supporting documents, including mortgage statements, leases, tax bills, and so on. Once your application is approved, you will open a new loan account where the HELOC funds of the total approved amount will appear. You then have access to these HELOC funds and can deploy them as you see fit.

The bottom line

HELOCs on an investment property can be a great way to access capital for future deals or renovations or to pay off a higher interest debt. HELOCs are typically easier and quicker to get than refinances or new mortgages, so they tend to be a useful instrument for a real estate investor looking to get more capital flexibility.

As with anything, you must consult a professional broker or banker to give you more details on the specific HELOC lender requirements.

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Many investors and homeowners access the equity in their properties for a number of reasons. While there are a number of advantages, homeowners also need to be aware of the risks involved.

With the End of the Financial Year only a few weeks away, now is a great time to think about what you have planned for the next 12 months. Are you planning to expand your property portfolio or renovate your property? Accessing your equity could help you achieve this.

Firstly, equity is simply the difference between what you owe on the home loan and what the property is worth. For example, if you have a property that is worth $400,000 and you owe $250,000, your equity is $150,000. You can grow your equity by either the value of the property increasing or reducing how much you owe.

The quicker you are able to boost the equity in your home, the more options you will have financially. But what are the pros and cons of accessing your equity?

Access to extra money

Being able to access your equity without having to sell the property is one of the biggest advantages. The funds that you borrow are at home loan interest rates which can be a lot lower than other types of credit. The most common include purchasing another property, investing in shares and managed funds, car/boat purchase, overseas holiday or even funding a renovation.

Could boost value of home if money is used for renovation

Some homeowners access their equity to help fund a renovation. If done correctly, a home renovation can help boost a property’s value even more than what is spent. It could also save you from having to upsize, saving you the cost and inconvenience of changing over properties.

However, renovating shouldn’t be done on a whim without any research. Overcapitalisation is a common mistake for renovators who do not do their research and who are not careful with their budget. This is where the amount spent doesn’t increase the property’s value by the same amount. Speak to different professionals about what the most cost effective solutions are for adding value to your home.

Larger repayments

Accessing equity is done via increasing how much you owe. It is still a loan with interest charged for using the funds. At the moment, you may be able to afford your current repayments, however, if you increase your home loan your repayments will increase.

Before applying, make sure you speak with your lender about your options and what the likely repayments will be. What will you be using the funds for? Will they generate income that will help meet the additional repayments like dividends or rental income? Will it be used for an asset that will be increasing or decreasing in value?

It is also important to think ahead of time and what your financial situation will be like in a few years. With interest rates at a record low, many borrowers may be able to afford an increase in repayments now, but what about when interest rates start to rise? It could put you in serious financial stress if you are unable to meet repayments.

Increasing risk

If you are borrowing extra to invest, you need to consider how the risk is magnified. Borrowing allows you to invest money you wouldn’t normally have without saving the funds, but it also means that if the investment doesn’t give the return that you expect or you make a loss on your investment, then this loss is further compounded by having to pay interest on the funds in the first place. Always seek the advice of a qualified professional like an accountant or financial planner and understand the risks involved and how this fits with your risk profile.

Excessive interest if not repaid quickly

If you increase your home loan to purchase an item like a car, furniture or a holiday, it is important that you focus on repaying this debt as soon as possible. Although the interest rate is relatively low, these are items that don’t hold their value. Spreading a smaller purchase over a 25 or 30 year loan term will mean that you will end up paying thousands of extra dollars in interest. So if you do access your equity and increase your loan amount, speak to your lender about having this amount ‘split’ from your home loan or put into a separate account. This way it will still be under the same interest rate, however it will also have its own statements and repayments, so you don’t forget the debt is still there. You can then focus on paying this off quickly.

homeloans.com.au has a range of home loans which can be divided into portions and also have features like offset accounts and free redraw. So, if you wish to keep your loan increase separate from your home loan in order to pay it off sooner, you can.

Before considering accessing your equity, it is vital that you seek the advice of a professional. As you will be increasing your debt, you will be exposed to higher risks. An accountant or financial adviser can give you expert advice about what options will suit your own personal situation.

The equity in your property can be a valuable resource, as it may allow you to secure finance to achieve your goals, whether they be investment or lifestyle-oriented. If it’s something you’ve been thinking about, here are some pointers – the most important being if you borrow against your property and can’t make the repayments, you may lose your home in the process.

How to access equity in investment property

What is equity and how is it calculated?

Home equity refers to the current market value of your home—which won’t necessarily be the price you purchased it for—minus the amount still owing on your home loan. To give you an example, say your home is valued at $800,000 and you still owe $300,000 on it, you’ll have $500,000 of equity. Keep in mind that as the market value of your property can go up or down, so too can the equity you have in it rise and fall.

To find out how much equity you have currently, you can organise a property valuation through various banks, lenders and independent agents. Also note, even if you do have equity in your home, this doesn’t mean you can automatically borrow against it. Your lender will look at additional factors, such as your age, income, debt levels, the property’s location and whether you have any children.

What do people use home equity for?

The equity in your home can be used to secure finance for a variety of things. As you’re effectively increasing the amount you owe to your lender and using your home as security for your borrowing, it is wise however to think about the long-term impact of taking on added debt.

For instance, you might be looking to access money to invest in another property or shares, undertake renovations, or pay for other big ticket items. Borrowing money to pay for holidays or things that depreciate in value will come with greater risk.

Ways to grow your home equity

The equity in your home can increase a few different ways.

  • You can add to the value of your property by renovating and improving your home’s street appeal. The key here however is to avoid overcapitalising, which is when the cost of renovations outweigh the value added to your home in the process.
  • If your property is in a high-growth area or you’ve owned it for a number of years, the property may appreciate in value without you doing anything. However, depending on property market variables, the reverse could also happen.
  • Another way to increase the equity in your home is by reducing the size of your home loan, which you can do a number of ways.

What to consider first

Before you use your home equity to take on an additional loan, or increase the one you have currently, there are a number of questions worth asking:

  • What are you using your home equity for and is it a wise investment decision?
  • How much will your repayments to your lender increase by?
  • Will you need to extend the term of your loan?
  • Have you accounted for a possible rise in interest rates?
  • Do you have a household budget in place to accommodate for additional costs?
  • Can you access the equity in your property via your current lender or will you need to refinance?
  • If you do swap lenders, have you thought about break costs, application costs—establishment, legal and valuation fees, stamp duty, and when lender’s mortgage insurance may apply?

Further information

Accessing the equity in your home could help you to achieve your goals. However, it’s important to stick to a workable budget and be committed to making your repayments on time.

Speaking to your financial adviser could go a long way in simplifying the process. And, if you don’t have an adviser you can find one using our online locator or by giving us a call on 131 267.

Taking out a variation on your home loan could unlock one of your most valuable resources.

It wasn’t so long ago that the only way to access home equity was by selling a much-loved home. These days, home loans have made it a lot easier to tap into home equity and it’s giving home owners greater opportunities to fund personal goals.

Steady growth in home equity

In case you’re not familiar with the term, ‘home equity’ refers to the difference between your home’s current value and the balance of your home loan. If your home is worth $700,000 for instance, and there is $200,000 remaining on the loan, your home equity comes to about $500,000.

Many home owners could have a lot more equity at their disposal than they realise. Australia’s residential property market has historically been a solid long term performer, and industry figures show that across the nation’s combined state capitals, property prices have risen by around 5.1% annually over the past ten years 1 .

If you have owned your place for several years, you may have a healthy pool of equity – money that could be put to work growing your wealth.

A useful funding option

The big question for many home owners is how to access home equity. If you have sufficient equity in your home, many lenders will allow you to increase your home loan so you can invest the equity as you choose – be it for a rental property or other investments, or channeled into lifestyle goals like a home renovation.

One of the key pluses of accessing equity in your home is that you could access funds at a low home loan rate.

While increasing your loan could be a useful tool you need to be sure that you can comfortably manage the additional repayments. Speaking with your bank or mortgage broker is the starting point to knowing how much home equity you could tap into and whether it’s the right option for your needs.

If you want to tap into your home equity without taking on debt, a home equity sharing agreement can be a good choice.

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A home equity shared agreement is an agreement between you and an investment company that gives the company a portion of your home’s equity in exchange for cash.

You’ll lose partial ownership of your property with these agreements, but you’ll get access to interest-free cash, and you also offload some of the risks of falling home prices.

This guide will cover how a home equity sharing agreement works, companies worth considering, and what the benefits and downsides are.

In this guide:

How Does a Shared Equity Agreement Work?

A shared equity agreement allows you, the homeowner, to receive a lump sum of cash, that can be used however you’d like, without taking on debt or monthly payments. In return, the investing company receives a percentage of the future appreciation of your home.

The company you sign the agreement with will make money if your home increases in value during the term you agreed to, typically between 10 and 30 years. If your home losses value during that time, the investing company will share in the losses with you.

Before the end of the term, you’ll be required to repay the principal amount plus the company’s share of appreciation. If the home decreased in value, you’ll deduct the depreciated amount from the principal amount you owe.

Here are two examples of the estimated cost of using a home equity shared agreement if you received $100,000 in return for 25% of your home’s equity.

Appreciated Home Depreciated Home
Starting home value $1,200,000 $1,200,000
Valuation adjustment* 15% 15%
Adjusted home value $1,020,000 $1,020,000
Home value at repayment $1,700,000 $800,000
Equity being shared 25% 25%
Principal funding amount $100,000 $100,000
Amount you owe $270,000 $45,000

*Most companies add a valuation adjustment to the appraisal of your home for risk purposes. The amount your home appreciated or depreciated is based upon the adjusted home value.

How to access equity in investment property

Many lenders and loan programs frown upon investment properties. Lenders do not want to stick their necks out for a property that may turn out to be a failure for you. Rather than settling for high-priced financing, you have the option to use the home equity in your primary residence to help you purchase a rental property.

How much Home Equity do you Have?

You must start with figuring out how much home equity you have. The formula is simple:

The current value of your home – the current outstanding principal balance of your mortgage(s)

For example, if your home is worth $300,000 and you owe $100,000 on your current mortgage, you have $200,000 in equity in your home. That money is yours to do with what you want. Of course, you have to tap into it with a home equity loan in order to get it, but you can take the money out and use it for a down payment on a rental property or even pay for another property in cash.

Figuring out what you Can Use

Generally, you will not be able to take out 100% of your home equity. Most loan programs limit borrowers to 80% of the value of their home. In the above example, this would mean that you could have a maximum of $240,000 in outstanding mortgages. Since you have $100,000 in a first mortgage already outstanding, that leaves $140,000 available for a home equity loan.

Determine your Next Step

The next step is to determine how much you plan to spend on your investment property. Will you pay cash, meaning you will only purchase a rental property that fits into the amount of equity you have available from your line of credit? Or will you use your equity as the down payment and secure a mortgage on the investment property for the remaining amount? Essentially, this way you do not have to put any of your own cash into the investment, but that can get risky as you now have 3 mortgages to pay: your current first mortgage on your principal residence, the new home equity loan on your primary residence and the mortgage on the investment property. If your investment falls through, meaning you do not find renters to occupy the property and pay you on time, you could end up in a financial disaster.

How to Secure the Equity from your Home

There are several ways for you to obtain the equity you have in your home:

  • Cash-out refinance on your primary loan
  • Home equity loan
  • Home equity line of credit

The ability to receive a cash-out refinance on your primary loan depends on the program you intend to use. Typically, conventional and government-backed loans will not allow cash-out in excess of 80% of the value of the home, but some FHA lenders can go as 85%. In this type of refinance, you receive the cash in hand at the closing and do with it what you desire. Whether you put the entire amount down on a home or you put it in a savings account, you have to make full principal and interest payments on the loan right away.

A home equity loan or line of credit are separate from your primary loan. The difference between the two is as follows:

  • A home equity loan provides you with the entire amount of cash up front. It works in much the same way as a cash-out refinance with the exception that it is a separate loan that you make separate payments on, which means principal and interest payments on the full amount.
  • A home equity line of credit provides you with access to your equity in a separate account. The main difference with this type of loan is that you do not make full principal and interest payments on the full amount of equity. You only pay interest on the money you withdraw to use on your rental property or whatever other use you have for it. This occurs for 10 years and is called the draw period. At the end of the 10 years, you cannot draw on the funds anymore and you must start paying back principal and interest for the remainder of the term.

Benefits of Tapping into your Equity to Buy a Rental Property

There are many benefits to tapping into your equity on your primary home in order to buy a rental property:

  • The interest rates on investment properties are usually pretty high, which can make it a costly investment for you
  • Home equity loans have more favorable terms than investment property loans
  • The closing costs are usually lower for home equity loans or even cash-out refinances

Lenders often look at any type of equity loan as a much lower risk than providing a loan on an investment property. Once you have “skin in the game” on an investment property, lenders provide much more favorable terms because you are less likely to walk away from the property if your investment fails.

Another advantage of having the cash in hand to purchase a rental property is the benefits you provide the seller. If you do not have a finance contingency on your sales contract, you might have more room for negotiation with the seller. This could mean more profit for you on the purchase of an investment property in the long run.

If you wish to purchase a rental property, consider tapping into the equity of your home to pay for it. If you did your research and know the area is profitable and has many potential renters, then you stand to make a decent profit without worrying about another mortgage aside from the home equity loan. With the lower interest rates and costs, it can be the least costly way to start your venture into investment home ownership.