If so, great plan! Using equity in your home is one of the most common ways to transfer wealth that you’ve built in an asset and transfer it to another asset.
You’re probably facing two scenarios, either you’re:
(1) Using your equity to buy another home you’ll live in, or (2) Using your equity to buy an investment property
In option 1, you’re using equity in your home to transition to another home you’re going to live in. Using equity this way is very common for a “move-up” purchase. A move-up purchase is where you take your equity and use it as a down payment to afford a larger home.
It’s almost like you’re climbing the ladder of home size with the equity you’ve gained over time.
In option 2, you’re using the equity in your home to put money down (or purchase in cash) on an investment property. Maybe you’re planning on flipping this property or renting it long term. Either way, this is a great option to make your money work even harder for you.
The equity in your home gains appreciation as your house appreciates, but in an investment, it appreciates AND gains cashflow through tenants.
So, how can you pull equity out of your home? First, you need to make sure you have enough equity to begin with. Most lenders will only allow you to have a max Combined Loan To Value (CLTV) of 80% - 90%, this depends on the program and lender.
Here’s how to find this out:
(Value Of Home) * (max CLTV allowed by lender) - (Current Mortgage Balance)
Here’s an example: let’s say you own a $300,000 house and you still owe $150,000 on it with a first mortgage. So, we would take $300,000 * 80%. That equals $240,000 as the max CLTV we can have. Then we subtract our Current Mortgage Balance from the CLTV. So, $240,000 - $150,000. That leaves us with ~ $90,000 we can pull out in equity.
Here are 3 ways you can pull equity out of your home: (1) Selling your home first - this is the most simple, but requires you to either get pre-qualified with two mortgages (not easy to do) or risk selling your home without a solid offer on another home. (2) Home Equity Line Of Credit - a HELOC is a line of credit that draws against your home’s equity. It may be interest only, but could have a variable rate. This is good for short term usage. (3) Cash-Out Refinance - instead of a line of credit, you’ll receive a lump sum of cash for you to use and you’ll refinance your first mortgage into a fixed rate.
Using your home’s equity to acquire more real estate is a great option. Using built-up equity in this way will help you put your money to work and leverage it to gain additional income or a home that might appreciate more (especially if you’re moving to a good school district or desirable neighborhood).
Hey, my name is Kyle and I'm a Mortgage Advisor serving Tennessee, Florida, and Ohio. My goal is to help you get a crystal-clear home loan that helps you win the house you love. If you're ready to create your home-buying plan, you can reach me through any of the ways below:
0:00 Can You Use Your Equity To Buy Another House? 0:59 Buying new primary residence 1:39 Buying instant property 2:39 3 main ways to pull equity 3:22 Sell 4:10 HELOC 6:31 Cash-out 7:59 How to calculate
