If you have a home that you have been paying on for several years you may have a lot of usable money (home equity) right under your nose? A home
equity loan just may be the perfect way to get your hands on that money to use for paying off those high interest credit cards, home improvements, college tuition, etc.!
Here’s an example of how a Home Equity works:
Let’s say that your current home mortgage was originally for $250,000. After several years of paying on that mortgage you now only owe the mortgage company $150,000. In this example, you would have $100,000 in equity in your home. But lets also factor in inflation. Say your current home will appraise, today, for $325,000.00. This means you have a total of $175,000 equity in your home. Most lenders will let you borrow up to a maximum of 80% of the total equity - which in this case is:
$325,000 x 80% = $260,000
less your first mortgage balance of $150,000 will equal
$110,000 of equity you can borrow.
A home equity loan is a specific type of loan that will allow you to borrow against that “equity” you have built up in your home. Actually there are two “types” of equity loans to be considered. Home equity loans and a Home Equity Line of Credit.
“What’s the difference in a Home Equity Line and a Home Equity Loan?”
A Home Equity Line -
* A line of credit amount established on revolving, variable rate basis. Only requires a minimum payment amount. NOTE: Works very much like a credit card product with the minimum payment feature and a revolving term.
* Not intended to payoff at a set maturity date.
* Intended to utilize the equity in the home, usually to qualify as a home mortgage interest deduction (to be determined with your tax consultant).
* Not recommended to use to consolidate credit card debts.
* At maturity date, remaining balance is renewed into new home equity line.
* Can usually be obtained with no closing costs promotions at lending institutions.(Most do have a prepayment penalty clause if loan is paid off in short period of time to collect their costs).
A Home Equity Loan -
* Fixed Term and Fixed Rate (usually 36 months - 180 months, depending on lender)
* Utilizes the equity in the home, usually qualifying as a home mortgage interest deduction if qualifies (to be determined by your tax consultant).
* Can be first or second mortgage loan.
* Pays off in full at maturity date, and can be accessed by payment book or automatic payment with lending institution.
* Recommended for use when consolidating consumer debts, especially credit card debt, so that will be eliminated when loan paid off.
* Can usually be obtained with no closing costs promotions at lending institutions. (Most do have a prepayment penalty clause if loan is paid off in short period of time to collect their costs).
Why would you want borrow more money out of your home? The number one reason that people take out home equity loans, or home equity lines of credit, is to consolidate their debts. Because a home equity loan is a secured loan, the interest rates are considerably lower than that of credit credits or even personal loans. So if a person had the average credit card debt of say $10,000 they could reduce the total amount of their monthly payments AND reduce how much they owed by taking out a home equity loan, or home equity line of credit. You would then use the cash to pay off your credit card debt and reduce your indebtedness by greatly reducing the amount of your “nondeductible” interest you will pay over the next several years.
Another great reason for taking out a loan of this type is to make improvements on your home. Have you been thinking about remodeling your bathroom, or the kitchen, or maybe adding a swimming pool to your backyard? A greenhouse, or studio to your yard or maybe a sun room? A home equity loan is a great way to finance these types of projects.
Your first step should be to talk to your current mortgage company or your local Bank about your options, but don’t stop there. You will quickly find that there are plenty of Banks and other lenders who are willing to make you a Home Equity loan or extend you a Home Equity Line of credit. So you should shop around for your the best deal - and there are plenty of good deals out there!
Michael Domeck was a multiyear sales and listing award winner for Century 21 and has designed and built many homes over the years. His wife has been doing mortgage financing for over 20 years. Together they can show you what all the “mortgage hype” is all about. Find out the secrets to getting the best mortgage financing at the best rates and the lowest fees. Learn why re-financing may NOT be the best way to go and why! Visit:
Free Advice Mortgage Re-Finanacing to get Free Advice on Mortgage Refinancing, Mortgage loans and how to handle credit problems!
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Lately I have been thinking about the
real estate business, and how it has changed so much over the past 10 years. Most of the techniques taught today were around 10 years ago. There were people doing assumptions, lease options, flipping, rehabs, etc., back then too. But what is really different today is the increase in the number of courses, infomercials and clubs that encourage people to become real estate investors. And those efforts are obviously working. The ranks of those who call themselves real estate investors have swollen dramatically during the past 10 years.
Most are attracted to the promise of quick profits from flipping or rehabbing. It is exciting to think about having the opportunity to make a 20K profit in just a few days time on a flip deal. I have seen it done. I personally participated in a deal that netted $25K in profit in only 3 days. On a number of occasions I have seen 10K profit deals put together in just a few days. It does happen. Guess what else happens? You get to pay a significant portion of those profits in taxes. Oh, and people forget to tell you that they can’t get the money together to buy your flip, so you show up at closing with a seller expecting to sell, and no buyer there to cash you out. Or, you luck out and get seller financing on that older house that has those hardwood floors everybody wants, lots of attic space for a new bedroom, a great lot, good location, everything you could ask for in a rehab, except one thing - an interested buyer.
It can get very scary when you can’t find a buyer for your flip or worse, no buyer for a retail you just spent $30K fixing up. When your buyer fails to show for closing and you are on the hook to buy a house you don’t really want to keep, it can make for some very anxious moments. The older I get, the more I like the idea of sleeping at night. Losing $20K on a deal is VERY scary, just like making $20K is fun. And you have to keep in mind that it can go both ways. You win some and you lose some. I have lost money on real estate deals and I have seen friends lose more than $25K on one deal. I would be willing to bet that there is not a full time investor that has never lost money on a deal at one time or another. That is OK when you are well financed and can weather such a set back. But the average investor who is just getting started cannot afford such loses. That’s why my thoughts and interest have returned to the old fashioned rental property business.
Let’s not be blind here, you can lose money on rental property too, but in my opinion the odds are much more in your favor when you are planning to buy and hold. You will still need operating capital. There will always be expenses you need to be able to cover, but by and large, over the years you hold a property, it will likely increase in market value and rental income, thereby yielding asset growth and increasing net cash flow. If you can make it through the lean start up years, you will likely find yourself “sitting pretty” 10 years down the road, if you apply a diligent program of buy and hold over a 10 year span.
Rental property has been around since the second house was built. It is a tried and true business model. But is has to be run like a business in order to avoid the burnout common to so many rental property owners. Most landlords are mom and pop operations, with no real business organization when it comes to managing properties and tenants. This lack of management skill causes many a landlord to eventually grow tired of the business, thereby becoming motivated sellers.
The best course that I have seen on the topic of rental property management was written by John Adams. It is not as much a course as it is a handbook. According to John it is a compilation of the management techniques and methods he has developed over the past 25 years. I like it because it is specifically tailored for the state of Georgia. Of course I have not seen everyone’s course, and I am sure there are others that are good. But I highly suggest you take in one of John’s very inexpensive seminars on long term real estate investing. You can check out his seminar schedule at www.money99.com
(he did not pay me to say this, in case you are wondering!)
Rental property is not the exciting “get-rich-quick” opportunity that flipping and rehabbing appear to be. But when managed professionally, it can be a more or less worry-free way to accumulate real estate wealth. There is risk in all of real estate investing. But the risks with some techniques are much higher and potentially much more difficult to deal with than rental property. Rental property doesn’t have the “James-Bond-like” excitement of quick cash deals, but you will probably sleep better at night than ole’ James does.
If you have questions or comments on this or any real estate related topic, you may contact Donna by email at assets20@hotmail.com.
Donna Robinson is a real estate investor, author, and consultant located in Atlanta Georgia. You may read more of her articles on her website at http://www.RealEstateInvestorHelp.com or you may contact her by email at drobinson@reihelp.com or call 404 542-9903.
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