Friday, August 16, 2013

Using home equity to buy income property

As home prices rise nationwide and interest rates remain lower than average it seems like a good time leverage your finances and make a real estate investment.
After all, history tells us that property values will eventually be near the top of a 15-year cycle and interest rates probably won’t stay this low forever.
So, what’s the best way to purchase an investment property with the finances at hand?
Traditional methods include financing the purchase with a mortgage, one that takes advantage of low rates and incentives, or selling stocks and bonds.
Most money gurus will say to stay away from retirement accounts: Don’t take out a loan from a 401K, or cash in a portion of an IRA.
There’s another way to get that money you need to buy an income-making property, and with home values rising, securing a home equity loan may be the safest way to get your hands on the cash you need for a second property.
Equity is the difference in what a homeowner owes and their house say, and the home’s current value. So, if you owe $100,000 and your home is worth $200,000 you have $100,000 in equity.
 A home equity loan, or home equity line of credit can position you to take advantage of low interest rates and low home prices.
Lenders often give better terms to buyers tapping their home's equity to pay for a second home because they have a lot on the line. Buyers using their primary home's equity will work harder to pay off the loan and are less prone to miss payments. In addition borrowing with a home equity loan costs less.
There are risks, however, said Greg McBride, a senior financial analyst for
By tapping your home's equity you'll be increasing your monthly mortgage payments and increasing the risk of losing your primary home to foreclosure.
Also, by buying another home you're tying up a lot of your money into one type of asset, McBride told CNN Money.

 "You're putting a lot of eggs in the real estate basket. Wise portfolio management says that's not prudent," he said.

-Ralph Bartholdt

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