Is a Home Equity Loan for Investment Property a Wise Idea in the Midst of the Economic Downturn?

Posted on: January 25, 2012

Categories: Buy

Author: lbuen

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Home Equity Loan Investment Property Purchase

With the housing market hitting the skids and houses selling at downmarket prices, you may be considering the idea of buying your very first investment property. But the question is where will you get the money to fund the investment? There are a lot of ways to get such funding: from a wealthy relative, private investors, hard money lenders, from banks and other traditional mortgagees and several others. These financiers provide various types of loans but if you are looking for one with a relatively cheap rate and you own another property such as your primary residence, then you may want to take a look at home equity loan for investment property.

What You Should Know About Home Equity Loan for Investment Property

Home equity loan or HEL is a kind of loan where you use the equity in your home as collateral. Its loan period is usually shorter, typically 10 years, as compared to other traditional mortgages. which can take 30 years. Most homeowners use home equity loans to to back big-ticket expenses like home renovations, college tuition or medical bills. However, you can also take out a home equity loan to buy or renovate investment property. You must be aware, however, that this type of loan creates a lien against your home, and reduces actual home equity. Also, a home equity loan only comes with an adjustable interest rate rather than a fixed rate. Such variable rate does not provide stability as it can go up and down with the interest rates in the general economy. In the current economy’s state, this could mean that your interest rate can drop once the economic landscape brightens. Also be informed that lenders will typically fund only 60 to 70 percent equity of the appraised value of the property. To illustrate, a lender will not lend more than $14,000 as home equity loan to a borrower with a house that has an appraisal value of $100,000 and with an equity of $20,000. Nonetheless, a home equity loan appeals to many borrowers because the interest on the loan can be considered as tax deductible as a business expense.

Home Equity Loan, Investment Property and Your Personal Home

One important thing you must bear in mind about taking a home equity loan is that you can possibly lose your very home if you default on payments. If the investment property you acquired is, after all, a bad investment, then you could lose home sweet home. So make sure that you have done your due diligence about the rental property or upper-fixer that you are considering to buy before putting your own home on the line.

Another relevant detail you should keep in mind is that the current housing market value dictates the actual amount of equity in your home. With prices of home plummeting, the actual equity in your home may have also dropped. But if your home is in a local housing market that is doing fine, then you are in luck.

Home Equity Loan Investment Property Renovation

If you already own an investment property and you want to bring it up to code, a home equity loan can also be used to fund this project. However, in the current economic and housing market condition, renovating a property for reselling may not be such a good idea. While rehabs can increase the value of a property when times are good so that you can resell the property for a profit, this may just not be the case during these times. It is also wise to renovate a rental property when the economy is doing well since your rental property will compete with your tenant’s idea of owning their own homes. However, if you see to it that your property is well maintained with repairs always taken care of, this will encourage tenants to stay long-term. It is also the ideal thing to do when the economy is booming because tenants can afford higher rents so that you can recoup your repair expenses.