It is really important that you understand the two available home equity debt types first:
- Home equity loan – The most common option. It is usually a lump sum offered and associated with fixed rate home loans.
- Home equity line of credit – Also referred to as HELOC. This is really similar to the credit card as it does involve revolving balance. Interest rate is added to outstanding balance and we normally have varying rates over time.
The really good news is that whenever homes rise in value, mortgage brokers or banks will be interested in loaning money through one of the options mentioned above. However, you do not necessarily need to use the financing option.
It is always a very good idea that you talk with a financial advisor whenever using home equity for a loan that would be used for business purposes. He will help you to make smart business decision. Whenever deciding, you have to consider the following:
- Is the investment going to offer a potential tax return?
- Will you be investing in a new property that you would eventually flip or rent out with the purpose of getting some extra funding for your business? This is one option that many business managers use these days.
- Is there an adjustable rate that will appear with the home equity loan? If this is the case, there is a possibility of there will be an interest rate jump in the future. That can end up being pretty expensive and gains that would appear when investments are made would be offset. Obviously, when the rates go down, the news is great. However, at the moment this is not likely.
- Yearly appreciation rate. How much does the property appreciate on a yearly basis based on neighborhood averages? Can that offset investment costs in the future? If this is the case, the choice of taking a home equity loan is definitely a great idea.
- Will the home equity be necessary at a later point in time, when emergencies appear? This is an important thing to consider as emergencies normally tend to be problematic. You want to be prepared for everything in business and in life so be sure that borrowing is not actually strained to a maximum level.
- The liquidity of the investment. In the event that there is a major expense that appears, is it possible to have cash without difficulties?
- The debt that you have at the moment. There are situations in which it is a really bad idea to take out a home equity loan even if it is possible since that would make debt be very hard to deal with.
- Future repayment has to be properly assessed. We talk about an extra monthly payment that has to be done and an investment may bring in profits only after a longer period of time.