"How to Use Your Home Equity to Your Advantage"

"How to Use Your Home Equity to Your Advantage"
By Andre Plessis

Once you have purchased a home and are making monthly payments, you are in the process of building equity. The opportunity to use the equity you have built up in your home is one of the benefits of homeownership. Many companies will encourage you to borrow money from your equity to pay off debt, buy a car, travel, pay for college education, for home improvement but nobody encourage or show YOU that one of the smartest way to use your home equity is to invest in another property.

Let me also share my personal opinion with you about this industry. Most mortgage companies ENCOURAGE homeowners to REFINANCE THEIR HOME FOR THE WRONG REASONS. I truly think that homeowners should be very careful when it comes to refinance their home and the way they use their home equity. Using your equity to consolidate debts or taking cash out should be the last resort.

Here is a Table Showing the Most Common Uses of Home Borrowing Equity:
 

Why Should You Use Your Home Equity to Buy Other Properties?

There are two ways to build equity in your home. First when you pay principal on your mortgage and second when properties appreciate. In recent years home have gained tremendous value in most part of the country and some parts better than others such as in California.

House price appreciation by metro area

You could take out $75,000 cash from your equity and put $60,000 down towards the down payment for your second home that costs you $200,000.

So your new loan for your first home is $242,372.62 and if we assume your interest rate is 6% then your new monthly payment will be $1,453.15 which is an extra $254.05.

The loan on your second home will be $200,000 - $60,000 (down payment) = $140,000. With an interest rate of 6% your monthly payment will be $839.37.

So you just bought your second home and now you have an extra $254.05 + $839.37 per month which is $1093.42. Remember that you pull out $75,000 cash from your equity but you put $60,000 down so you have an extra $15,000 that you keep on a savings account.

Now it is time to rent the second home you just bought. We will assume that you can rent your second home for $1,100 and since you have an extra $1093.42 payment to make we will assume you are even.

Before you buy your second home I would check on condo or home rental patterns where you live and see how quickly condos and homes are generally rented and what their going rent might be. If you live in a city where it's hard to rent and there are areas where that's the case you may end up paying your condo/home expenses out of your own pocket. At the very least, you'll have to cover the the extra payment while you try to rent it or if it goes unoccupied for a while between tenants. That is why you have to put some money aside such as the $15,000 suggested earlier. $15,000 will cover you for one year, which will be more than enough to keep you out of trouble.

So now that you rent your second home you have a tenant who pay the mortgage on your second home. How neat that is!

You can repeat that scenario as often as you can and wish.

Factor in the tax breaks

Mortgage interest and property taxes on second homes are typically deductible. The write-offs are limited to two homes, however. Own any more, and Uncle Sam won’t help you pay for them.

Another potential tax break: You don’t have to pay taxes on any rental income on a home if it’s rented for less than 15 days.

Of course, you won’t be able to deduct rental expenses, either. If you rent your home for 15 days or more, you’ll have to declare the income, but you can deduct things like cleaning, maintenance, repairs, utilities and rental agent fees. You’ll have to pro-rate your expenses to reflect your personal use of the house. IRS Publication 527 has more details.

So if everything goes well and real estate continues to appreciate as it did over the past decades, you could retire and have at least two homes. By the time you retire, your properties would have gained value and you will be better off than those who decided to use their equity to consolidate their debts or take cash to travel or buy things that do not help you grow.

Let's assume you buy your homes $200,000 and after 30 years they are worth $500,000 each, you have $1 million in asset once they are paid off. You could sell your second home and have $500,000 for your retirement. Keep in mind that by the time you retire, the U.S government will probably not be able to support you, so you might want to think about investing in a second home. Depending where you live you will make more or less profit investing in real estate. You can buy a few homes and potentially make a lot of money. You don't have to be smart to do it, you just need to know about it and do it.

As you can see there are two ways of using your home equity. Either you follow the advise of sales people in the mortgage business who encourage you to refinance for any reason so that they can make money or you use your equity to your own advantage and make money in real estate to secure your family future. The choice is yours!

Andre Plessis

Andre Plessis
"The Mortgage Guru"
"A Mortgage Professional whose primary goal is to provide the expertise, guidance and skills necessary to obtain the best mortgage to meet your personal needs".
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P.S. If you are at all intimidated or unsure about the mortgage process if you don’t understand how to evaluate your options in getting a mortgage loan our 15 key questions will help you feel comfortable that you are making the best decisions. Also if you are in the process of refinancing your home with anyone, CALL ME and I will let you know if you are being offered the best loan option based on market conditions and your financial situation.

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