Many people are not aware that even with a mortgage on their home, they are sitting on quite an amount of money in the form of equity. What is equity? The difference in money between what your house is currently worth and how much you still have to pay for your mortgage.
So, assuming your home is worth somewhere around $540,000, and you still have $140,000 to pay, that leaves you with $400,000 of equity. Of course, this depends on where you are in your mortgage payment process. Someone who is close to repaying off their house will enjoy a larger untapped equity than someone who is just starting out.
No fixed loans
First things first – make sure you don’t opt for a long-term fixed rate loan because that will make it really hard for you to obtain a refinancing and it’s going to cost you a pretty penny. Instead, consult with a financial advisor who knows a thing or two about taking advantage of equity and can steer you in the right direction.
Calculate your equity
Know that you can’t access your entire equity, but learn how you can calculate it. So, let’s go back to our $540,000 house. 80% of this value gives you $432,000 equity. Out of this, you subtract what you still owe out of the mortgage, which we have settled is $140,000. This leaves you with $292,000 accessible equity, which you can then use to make additional purchases.
Using your equity
Once you’ve figured out what your equity is, you can start planning how to use it. Depending on the amount, you can use it to finance an investment property or more. Since our example is $292,000, that can easily be used for two separate properties. Even for these new properties you are buying, you’re taking out loans for 80% of their value, leaving you with that difference we talked about earlier, which can be used for extra costs.
Choose different lenders
If you plan on making new purchases of investment properties by accessing your equity, don’t opt for the same lender as your original mortgage. That will give them additional leverage and control over your finances, which you do not want. Chances are they are going to cross-collateralise your properties and try to pressure you into using profits from the new properties to pay off your original mortgage.
Looking at the costs involved
Generally speaking, if you decide to refinance in order to access equity, you won’t incur outstanding charges. You’re looking at something between $500 and $1,500 for loans $500,000 and under. If, however, you are unfortunate enough to have been locked into a fixed rate loan, it’s going to be pricey.
There are several different costs involved, each ranging from hundreds to thousands of dollars. In total, you can expect to pay an average of $3000, not accounting for your interest penalty, which is also a few thousands. It’s difficult to put a price on it because it depends on so many different factors, but suffice it to say that it comes out expensive.