One of the joys of homeownership, from a financial perspective, is the financial leverage it gives you. As an asset holder, you can secure new sources of funding at lower interest rates than if you simply approached a bank asking for a line of credit.
But while leveraging home equity can be incredibly useful, it is important to do it prudently. When employed strategically, home equity loans or mortgage refinancing can be a valuable source of capital. But as with any other financial tool, understanding how best to use it is key.
To that end, here are the four things all property owners should know about leveraging home equity.
1. Home Equity is an Important Resource
We tend to think of a mortgage as a process through which someone comes to own an asset, and that only when the mortgage has been paid off does the house become truly valuable.
But the moment you make a down payment on a property, you own a percentage of it, and as you continue to make mortgage payments and the value of the property increases due to market forces, this percentage — your home equity — grows accordingly. You can use this equity as security against a loan.
2. Home Equity Loans Can be Used for a Variety of Purposes
Home equity loans are the instrument through which you can turn equity into cash. These funds can be used for any of the following purposes:
- Debt consolidation
- Home maintenance
- Emergency expenses
- Starting a business
Mortgage brokers like Burke Financial offer a quick turnaround on home equity loans, so if you need funds on short notice, this is one of the best ways to secure them.
3. Refinancing Helps You Take Advantage of Lower Rates
If you are still paying off mortgages on one or more residential properties, a key thing to keep in mind is the rate of interest. Taking out a mortgage at a high rate of interest is sometimes unavoidable, but it is important to remember that you can refinance periodically, which can help to reduce your overall payments.
While interest rates have been rock-bottom throughout the coronavirus pandemic, there are signs they could start rising again, especially in hot housing markets, so if you’ve been considering refinancing, now is the time to do it.
4. Home Equity Should be Used Strategically
A home equity loan or a mortgage refinancing is a great way to make your equity work for you, but it is important to remember that, at the end of the day, these are still loans — they will need to be paid back eventually.
The last thing you want to do is simply add to your existing debt burden, so use the funds to invest in improving your property, or as a way of managing toxic debt, rather than buying a new car or investing in the stock market.
As any experienced entrepreneur knows, growing wealth is all about putting the assets you have to good use. If you have taken out a mortgage, your home equity could be a valuable source of funding, so get in touch with a mortgage broker today if you’re interested in learning more.