If you’re planning to buy an investment property, using the equity in your home might be possible. In this article, we’ll look at what home equity is, how it can help you purchase an investment property, the pros and cons and an easy to understand summary of home equity. 

Home equity is the difference between the value of your home and what you owe the bank/lender – commonly referred to as the “net asset value”. You increase your equity when you pay off your loan’s outstanding balance. With a home equity loan, you can obtain access to that money by setting up a new loan that is then paid back to the lender in normal payments over time. In other words, this is a type of second mortgage.

It is also important to identify the purpose of the funds. If the purpose is an investment property there are tax benefits whilst a second home does not have those benefit. If you will use the home equity loan for an investment property, calculate  the Internal Rate of Return (IRR) before making a decision.

A home equity loan reduces the loan required to purchase an investment and provide a financial buffer. There are a few key benefits to using home equity especially to purchase an investment property. These are usually received in a lump sum payment, giving you more cash to use toward your next property. If you put in more down payment, this could lower the monthly payment and interest. A second home is usually difficult to finance since this requires a higher down payment, but through home equity loan it could make it convenient and affordable.

The biggest advantage of a home equity loan is to lower your interest rate because this is fully secured by collateral which is real estate. On the other hand, some disadvantages are

  • Your home is being used to secure your mortgage.
  • Your home is exposed to property value fluctuations so additional lending could put your ownership at risk 
  • Your home equity loan payments may not be considered a tax deduction due to changes in tax laws.

Is getting a home equity loan worth it? Yes, it may be worth it to some, but we highly recommend consulting a mortgage broker or finance specialist before making any big financial decisions. Schedule a Free Consultation where we can provide you with the best financial advice that aligns with your investment financial goals.