How to Invest in Property With Home Equity Loans

When looking to invest in property, often the biggest hurdle you have to overcome is how you are going to finance the purchase. If the property needs work you also have to finance repairs. A home equity loan gets deposited into an account which you can write checks against as the money is needed, making it a good choice for many investment property purchases.

Instructions

Difficulty: Moderate

1. Decide if a home equity loan is a good choice for you. In order to finance your investment property purchase with a home equity loan, you need to own another piece of property that has equity in it to be used as collateral. For many people this other piece of property is their home. Equity is the dollar amount of the home that you actually own. To get a general idea of how much equity you have in your home, subtract the balance owned on your mortgage from the purchase price of your home.
2. Call several lenders to get rate quotes on home equity loans. Don't forget to also get a quote from the lender that holds the first mortgage on your home. Sometimes, getting multiple loans through the same lender qualifies you for lower interest rates.
3. Secure the home equity loan with the lender offering the best rate, and purchase the investment property, if the home equity loan was taken instead of a mortgage on the investment property. Or, take a mortgage to purchase the investment property and then use the money from the home equity loan for repair.
4. Build equity in the investment property, if you choose to keep it and rent it out. You build equity by paying down the mortgage if you took one, and paying off the home equity loan. Later, you can take a home equity loan against the investment property to fund the purchase and repair of the next investment property you want to buy.
5. Sell the investment property after the repairs are finished, if you purchased it with the intention of it being a short-term investment. Pay off the mortgage and the home equity loan as soon as the sale goes through and enjoy your profit.

Tips & Warnings

• Get rate quotes from several lenders before securing the loan, but do not fill out any applications until you have decided which lender you are using. When you apply for a loan and sign an application you are agreeing to a credit check. Too many inquiries into your credit record can hurt your credit rating.
• The actual amount of equity you have in your home is also determined by the current housing market value. If the price of homes has gone up since you purchased it, the actual equity in your home has also increased. If, however, home values have dropped, the equity in your home has decreased.
• Remember, you are risking your home when you use money from a home equity to purchase investment property. The collateral that you used is your home. If you made a bad investment and cannot pay off the home equity loan, the lender has a right to start foreclosure on your home.