Unlocking Home Equity: How to Purchase an Investment Property

One of the biggest questions we encounter, is how to come up with the funds needed for an investment property. The thought of saving up a 25% down payment seems daunting, ig not impossible given home prices. If this has been an roadblock in your dream to own a second home or investment property, then this article is for you!

As the real estate market continues to evolve, many homeowners are looking for ways to leverage their existing assets to expand their investment portfolio. If you've owned your home for the past few years chances are the value has increased dramatically. 

One popular strategy is tapping into the equity in their home to fund the purchase of an investment property. In this blog post, we'll explore how homeowners can access their home equity and provide a real-life example to illustrate the process.

Understanding Home Equity: Home equity refers to the difference between the current market value of your home and the outstanding balance on your mortgage. Put simply, it's the portion of your home that you truly own. Equity can increase either as you pay down your mortgage or as the value of your property appreciates. 

How to Access Your Home's Equity: There are several ways homeowners can access their home equity to finance an investment property:

1. Home Equity Loan or HELOC (Home Equity Line of Credit): These options allow homeowners to borrow against the equity in their home. With a home equity loan, you receive a lump sum, while a HELOC functions more like a credit card with a revolving line of credit.

2. Cash-Out Refinance: This involves refinancing your existing mortgage for a higher amount than what you currently owe and pocketing the difference in cash. This can be a favorable option if interest rates are lower than your current mortgage rate. 

Real-Life Example: Sarah's Story

Let's illustrate this strategy with a real-life example. Meet Sarah, a homeowner whose property has appreciated significantly over the years. With a desire to expand her investment portfolio, Sarah sets her sights on purchasing an additional property. However, she lacks the liquid funds for a sizable down payment.

After careful consideration, Sarah decides to pursue a cash-out refinance. With guidance from her mortgage lender, Sarah refinances her mortgage, unlocking a portion of her home's equity in the process. Let's break down the numbers:

• Sarah's primary residence is valued at $400,000.
• She owes $200,000 on her existing mortgage.
• Through the cash-out refinance, Sarah qualifies for a new loan of $250,000, reflecting the increased value of her home.
• After paying off her original mortgage, Sarah receives a cash payment of $50,000, representing the equity she's built up in her property.

With the $50,000 cash-in-hand, Sarah proceeds to use this as the down payment on her investment property. 

If Sarah were to do a HELOC, then she would be given a $50,000 line of credit that she could use to fund a down payment on a new property. In the case of a HELOC, the borrower maintains their original loan ($200,000), but is given a line of credit on the excess equity. Sarah is charged interest, usually adjustable, only when she uses the line of credit.

Unlocking the equity in your home to purchase an investment property can be a savvy financial move, offering the potential for significant returns over time. However, it's crucial to approach this strategy with careful consideration and consultation with financial experts. By understanding the process and utilizing resources effectively, homeowners like Sarah can leverage their home equity to embark on a path towards building wealth through real estate investment. If you'd like to look into using the equity built up in your current property, feel free to contact us for an equity evaluation.