I have a home that I bought ten years ago for 175K, today it is worth roughly 450K (primary residence). My question is this: What is this best way to use my equity for investing purposes? I know that I could obtain a HELOC but I’m not sure if there are other options. I want to start doing wholesaling and eventually buy multi-unit rentals. What are your thoughts. Thank you.
Brewer
A cash-out refinance or a Heloc are both options for extracting equity from your primary residence. However, while the equity in your residence is a tempting resource remember you are putting your personal home at risk by increasing the debt on the house for the sake of investments. Not to say I haven’t done the same but be careful.
Another approach is to leave it in your home and leverage it (cross-collateralize) instead.
You are exposed to the same down-side risks as the other poster alluded to, but it is a viable approach nonetheless.
Regards,
Scott Miller
Can you explain what you mean by cross-collateralize and how that would work? I am not familiar with this term. Thank you.
Brewer
The best way to access the equity is just to refinance it. You can typically do 70% LTV on a cash out and you’d also qualify for a prime rate which could be in the 6-6.25% range if you have good credit. If you got a HELOC or a 2nd mortgage, you’re probably going to be paying rates closer to 7.5-8.5%. You also don’t say what the interest rate on your first mortgage is so you’d really have to work the numbers a little just to make sure you’re doing the right thing.
I’m not 100% sure on this but typically cross- collateralization refers to the situation where you have more than one loan with a bank. To reduce the bank’s risk they like to have the collateral for each loan also serve as collateral for all other loans to the same person.
Someone please correct me if I’m wrong on this.
It just means you are pledging additional collateral to secure a loan. For example, I had a client that wanted an 80% ARV rehab loan on an investment property but the lender thought the value was a little shaky. They agreed to do the loan by placing a lien against the subject property AND another property she owned (cross collateralization) in order to secure the deal.