Many homeowners don’t realize the potential value of their home. They pay off their mortgages and then, if they chose to, prepare it for sale when they buy another home.
But other homeowners who know money might see their home equity as a treasure trove of investment possibilities.
Is it a good bet to take a loan against your home to invest in other, potentially riskier properties? We’ll answer that here.
What is a Home Equity Loan?
Home equity loans are loans are loans that use the equity of your home as collateral for how much you can borrow. To understand what that means, you have to understand how much your home is worth.
Home equity is simply the difference between the value of your home and the amount you own on any mortgage used to purchase the home. Obviously, then, it seems like the value of your home will always go up as your mortgage is paid off over the years. But other things can impact the value of your home. For example, the value of your property itself can increase or decrease independently of your mortgage or how many payments you made. Things like property values in your neighborhood can impact the equity available in your home.
Likewise, the value of your property is impacted by upkeep. Homes with extensive structural damage have less equity than homes that have been kept and repaired. Even cosmetic issues like bad siding, paint, or other issues can have an impact on your equity.
Once you understand how much equity you have in your home, you can take out a home equity loan against that value. This makes a home equity loan like a mortgage, in that it is a loan on your house (in fact, many people refer to home equity loans as a “second mortgage”).
Can I Use Home Equity to Invest into other Properties?
Once you take the loan, the money is yours to do with as you please. So long as you pay the money back on agreed-upon monthly installments, you can use the money to pay off debt or to purchase things like cars or other vehicles, or even another home or rental property.
Should I use Home Equity to Invest in other Property?
This question depends on how much risk you are willing to take on.
Because a home equity loan is borrowed against the value of your house, it is tied to that home. That means that if you default on the loan for any reason, your house can serve as collateral to pay back the bank.
So if you use the money to invest in other property, then you are running a risk of that property not really turning over any additional value. Which is all well and good, so long as you can still make the payments on your initial loan. But if your investment actually ends up with you losing money, or if some other financial hardship hits, you might find yourself in a bind.
But if you are willing to take on the risk, then it may be worthwhile for you to take a loan out on your property. Some might argue that paying of debt and staying out of debt are preferable to taking on more just to make a return, but there are different strategies for different investors.