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Mortgage Advice: Home Equity Loans Can Finance an Investment Properties and Second Homes |
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Submitted by Scotty Forte
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The idea of owning investment real estate seems to be gaining popularity as investors are getting tired of the unreliable stock market. Many investors feel confident with real estate as a place to secure their future, believing that overall it will outperform cash, fixed interest deposits and other investments, particularly for the medium to long term. Second homes account for a full 40% of all homes sold in America. According to a recent annual report by the National Association of Realtors (NAR), 27.7% of all homes purchased in 2005 were investment properties and 12.2% were vacation homes.
If you are considering either an investment in income producing real estate or a vacation home, it is generally better to cash out the equity in your home rather than to move cash from other investments which are doing well for you. If you've been paying on your mortgage for more than five years and the interest rate is below market rate, a home equity loan would probably work better for you than a mortgage refinance. And, a home equity line of credit (HELOC) could be your best answer for your second home purchase or other real estate investment.
There are generally no closing costs with HELOCs, as opposed to home equity installment loans (HEILs). HELOCs typically have a lower interest rate than credit cards or installment loans, and they offer a lot of flexibility in features and payback options, including:
• Interest-only loan payment option (based on prime rate1 + a fixed margin).
• Choose to pay only the minimum, or pay down your balance and have it available for you to use again and again for on-going maintenance of the property.
• 10, 15, or 25-year terms available with the option to extend the equity line of credit, rather than having to apply for a new loan, if there is still an account balance at the end of the loan term.
• Borrow up to 100% of property value and pay interest on only the amount you use.
• Lines of credit from $20,000 up to $250,000.
A property portfolio can provide healthy long-term capital gains, appreciating assets and cash flow from rent to add to your retirement income. In addition, the interest paid on a home equity line of credit is generally fully deductible (up to a maximum of $100,000), provided the loan does not exceed the fair market value less the outstanding mortgage.
1 Prime rate is the rate published each day in The Wall Street Journal (but not the Weekend Edition of The Wall Street Journal).
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