There are a lot of ways to build wealth, but one of the most common strategic paths for many Americans is in real estate. You don’t have to be a millionaire to build real estate wealth—you just need to know how to use what you have. If you’re a current homeowner, you have likely built up equity, especially over the past few years!
How-to-Use-Your-Home-Equity-to-Build-Real-Estate-Wealth
There are a few ways to use your home’s current equity to build real estate wealth. These include the utilization of home equity loans, cash-out refinances, or HELOCs (home equity line of credit).
Let’s get familiar with these terms before we dive into how they can help you build real estate wealth.
A home equity loan, also known as a second mortgage, lets you borrow money with your current home as collateral. You receive a lump-sum payment and, in exchange, you begin paying that money back on a set schedule, often with a fixed interest rate.
A cash-out refinance lets you take advantage of the equity and appreciation of your home. It replaces your current mortgage with a new loan that is worth more than you owe on the house. You pocket the difference and can use that money any way you like.
A HELOC is a revolving credit line secured by your home that lets you access funds at your leisure. As you pay off your outstanding balance, your credit line replenishes—just as it would with a credit card. You do pay interest on a HELOC, but only on the credit you use, which is also like a credit card.
All three of these vehicles can be used to build real estate wealth . . . it just depends on which one is right for you! An APM loan advisor can help you determine this based on your unique financial situation and goals.
Now that you know how you can use your home equity to build real estate wealth, let’s focus on the benefits of this strategy.
Enjoy Lower Interest Rates
Home equity loans, cash-out refinances, and HELOCs typically enjoy lower interest rates than other lending vehicles, but in the case of HELOCs, the rate is almost always adjustable. This means that not only does your rate change monthly over the course of the loan, but also that your payment will fluctuate depending on how much of your credit line is in use. Home equity loans and cash-out refis can be either fixed or adjustable, and with the balance being fixed, your payment can remain constant for the life of the loan. Of course, every situation is different, but you’d be hard-pressed to find a credit card or private lender that can beat the rates associated with leveraging your home equity.
Now, some types of student loans can carry low interest rates as well, but it’s not necessarily advisable to take these funds away from your education in order to build real estate wealth. Which brings us to our next point . . .
Preserve Your Current Investments
A student loan is an investment in your education—and it should stay that way. In this same vein, you’d hate to disrupt a money-making strategy because you need those funds to purchase a new home. While not every investment is a winning one, if your goal is long-term investing and your asset is making money, why would you want to stop that just to focus on another investment?
The answer is you wouldn’t. This is especially true if you’re thinking about dipping into a retirement account. Let your investments do what they do best—earn you money!—and choose a home equity loan or cash-out refinance instead.
Utilize Your Net Worth
Unless you come into a large sum of money from, say, an inheritance, there are few ways to leverage your net worth without disrupting your current holdings. You certainly don’t want to leave your bank account penniless in your desire to build real estate wealth. Nor do you want to take on high-interest private loans or credit card debt.
You can always sell some non-money-making assets to free up cash such as a car, boat, collectibles, or other household items, but why would you when you have readily available, low interest options open to you?
One word on this before we move on. Tapping into your home equity can be a smart way to build real estate wealth . . . but that freed-up cash (or credit line) can also be a temptation for some. Make sure you’re utilizing your hard-earned equity to potentially enhance your net worth, not using it to buy cars, boats, collectibles, and other household items, especially if your goal is to build real estate wealth.
When you’ve tapped into your equity through a home equity loan, cash-out refinance, or HELOC, you’ve opened yourself up to a world of real estate investment possibilities. This money can serve as a down payment on a new home, an emergency fund for unexpected repairs needed on your current home, or as your renovation budget if you’re thinking about renting or flipping the house.
Here’s the other great thing about building real estate wealth . . . it doesn’t even have to be your prime motivation for investing in an additional property! Multigenerational living can be great, but it’s not for everyone. You don’t have to be a home-flipper-in-training to feel the burning urge to help your newly married son buy his first home. Or to move your parents into a condo closer to you. Or to simply desire a second residence in your favorite vacation destination or closer to a satellite office you have to visit multiple times a month.
Building real estate wealth may not be the ultimate goal for everyone who purchases an additional property. Nor is it the goal of everyone who takes advantage of a home equity loan, cash-out refinance, or HELOC. Instead, it can be the byproduct of sound investing if that home appreciates over time or if you’re able to secure rental income.
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