Home Equity Loan on Investment Property – Is This the Right Loan for You?

Posted on: December 27, 2011

Categories: Buy, Commercial Building, Residential House

Author: Jong

300px 1000 United States two dollar bills in shrink wrap Home Equity Loan on Investment Property – Is This the Right Loan for You?

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Equity loan on investment property is one of the possible options for you to get the needed cash for the down-payment of your dream house or another rental property. There are many other types of loans out there, and this seems to be one of the promising options especially if you have an existing investment property that you can use as collateral.

Before jumping on board to this kind of loan, it is best to know what home equity loan on investment property really is, and determine its suitability in your case. This is by no means suitable for all circumstances. There are instances where this type of loan is not recommended. It is, likewise, important to know its pros and cons in order to better understand how this loan can help you.

What is an Equity Loan on Investment Property?

By definition, home equity loan on investment property is a type of loan made to partially or totally finance the required equity for a home loan. This loan is, obviously, secured by an investment property like a condo for rent, or any other property acquired and already owned for the sole purpose of making profit out of it.

Can you easily get approval for an equity loan on investment property? Well, that depends on several factors that include the type of investment property that you have, and your current credit score. If your investment property has a high market value and earning generous income per month, then banks and lenders will quickly give you a thumbs up for this type of loan.

However, it depends on the current financial market condition. In times of financial crisis and a falling real estate market where property values are tremendously going down to unimaginable low levels, this loan can hardly get approved since banks and lending firms will have a hard time disposing the property in the event of loan default. But this is not a problem under a bull market with rising real estate values.

Your credit score is another important factor. A good financial standing tells lenders that you are credit worthy. Banks will give you any secured loan for as long as you have a good reputation for paying your financial obligations on time.

Either way, equity loan on investment property is one of the best options for you to get your desired home loan that requires outright equity payment.

Equity Loan on Investment Property: Pros and Cons

While an equity loan on investment property can give you quick access to cash to finance your purchase of a home or investment property, it is important to keep in mind that getting this kind of loan only adds up to your total financial obligations to various lenders. Failure to keep track of all your debts may cause loan default, thereby putting your investment property at risk of being foreclosed.

Equity loan on investment property generally has significantly lower interest rates compared to the credit card rates and the standard rates of home equity loan on credit (HELOC). But being a second-mortgage loan, the rate is still relatively higher compared to a first-mortgage loan with longer terms. If you are using an equity loan on investment property to purchase another investment property, make sure that the return on investment of the latter is higher than the interest rate of the former.

Equity Loan on Investment Property: Is this Type of Loan for You?

So, what’s the bottom line? You may have come to a point wherein you want to acquire a property for your personal use or as another rental property through a home loan and the required equity is just way beyond your present cash level; an equity loan on investment property can provide a good solution to make both ends meet. However, you should also be mindful of your present financial capacity. Having two different loans at the same time can be quite heavy.

Unless you are good in financial management and you have a strong and stable source of income, an equity loan on investment property might be just what you need to get your dream house or rental property.

 Home Equity Loan on Investment Property – Is This the Right Loan for You?
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