If you’ve owned your own home for few years, the chances are that your property has increased in value at the same time that your mortgage has reduced. This equity in your home can be a lubricate mining because you can borrow against it to invest, letting you to control your home’s financial potential. Many people get confuse about ‘betting the house’, and this strategy isn’t right for everyone, but in the right circumstances it can significantly increase your wealth over the long term.
A home equity loan is a type of loan in which the borrower uses the equity of your home as collateral. This allows you to borrow against equity you have in your home. Form this loan you can buy another property, buying a business, renovate your house, repay your debts, buy shares and use for your lifestyle expenses such as holiday or buying a boat.
How it works?
The ‘equity’ in your home can be thought of as the profit—the difference between how much your property is now worth, and how much you owe on your mortgage. If you have owned your home for many years, your amount of equity has the potential to be in the hundreds of thousands.
An Example—Home Equity Loans
Sara owns her own home. She purchased it 7 years ago for $400,000. Over that time she has pay down her mortgage, which is currently at $200,000. And also, the values of homes in her area have increased substantially over that same timeframe. Today, her home value at $750,000, the equity in her home would be $550,000— the current value ($750k) minus the current balance of her loan ($200,000). Sara took a loan for $400,000 (80% of her equity), which she used to purchase her another investment property.
Possible Advantage of Home Equity Loans
- Tax-deductible interest – Mostly the interest associated with home equity loans have the added benefit of being tax deductible. This can help you maximise the financial benefit of investing. Get advice from tax expert to find out how you can make your loans tax deductible.
- Lower interest rates – Normally, home equity loans offer lower interest rates than other types of investment loans. Because the loan is secured by your home, these types of loans are considered less of a risk in terms of lender point of view.
- Put your home equity to work – Many homeowners with equity do not control this investment potential. Home equity loans can help you to unlock the added value to your home without having to sell and same time maximise your property portfolio.
Possible Disadvantage of Home Equity Loans
- Risk to your home – The most obvious consequence to home equity loans is the risk that if you default on your loan that your lender will sell your home to pay out the loan. If you are considering a home equity loan you need to understand that if you are unable to make your repayments, that you may possibly lose your home.
- Longer you’re home loan and more expensive mortgage repayments – That is for sure, by adding to another level of debt means your home loan will take longer to pay off, or your repayments will increase.
- Increased liabilities – When you borrow from the equity in your home you are reducing the amount of your home that you actually own and increasing your liabilities.