Creative Real Estate Investing Financing — Home Equity Loans/Line of Credit
Home Equity Loan -> mortgage products wherein all funds are disbursed at the beginning of the loan, with a definitive term and equal monthly payments
- E.G: $50,000 home equity loan for 15 years at 3.75%, would be $726 a month
- Home equity line of credit
- Not disbursed at the start of the loan
- Rather, it is available to you throughout the line, in the same way, that credit from a credit card is available to you
- Equity = the difference between what you currently owe on the home and the fair market value of that home. It’s what put into the total fair market value that is yours if a refinance gets approved
- purchase price = 800k
- mortgage owed = 300k
- equity = 800k — 300k = 500k
LTV -> or Loan-to-Value Ratio = Loan Amount / Fair Market Value
- Lenders do not go over a 75% to 80% LTV nowadays
Second, is the BRRR strategy -> get a home equity line of credit to fund the initial downpayment and as well as the rehab/renovation, then re-appraise and refinance the property for a greater purchase price, and use that money to repeat the process. This is really useful because you can re-use the same loan over and over again, without having to apply for another one.
You must also bear in mind that refinances require a certain time period to pass. And so that must be mitigated in terms of potential loss of rental income, and how you want to strategize the rehabbing. You could rehab quickly, then get tenants. It depends on you and what numbers make sense for you.
LTV on the second mortgage accounts for the primary mortgage you owe as well. So if the LTV is 80%, and you owe let's say 65% of that, the second mortgage is only going to give you 15% of the purchase price as liquid capital you can use. You will have to pay the bank back what you owe. And so, that may be enough for a downpayment, or it may be enough to rehab and refinance, et cetera.
A final creative example of leveraging financing is creating a Business Line of Credit -> combining the equity from…