Are you interested in buying a home in the Chicago area? If so, there are a lot of benefits to homeownership. Some are beyond the obvious that your real estate agent and mortgage lender tell you.
For example, did you know that you can build and borrow home equity? That’s right. If you purchase the right home, you can leverage your home like a bank.
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Of course, this needs to be done responsibly, but buying a home correctly and using the proper loan products gives you access to cash just in the nick of time when you might need it most.
In this article, we’re going to discuss how to build equity into your home. We’re also going to talk about how to use these loans wisely and what the funds can be used for.
Explaining Home Equity
What exactly is home equity? Well, when you purchase a home two numbers dictate your home equity. The price you paid for it and its current value in the marketplace.
For example, if you purchased a home for $100,000 and that home is worth $100,000, there is no equity for you to borrow from. However, if you purchased that same home for $50,000, you would have $50,000 worth of equity. This is because the original value of the home is $100,000.
That’s how you calculate equity: (The price you paid) – (What the house is worth).
It’s important to do your research when you buy your home. As easy as it is to gain equity in your home, it’s also just as easy to produce negative equity. This is when you pay more than the home is worth.
If we go back to our example, that would be like paying $120,000 for a $100,000 home. If that was the case, you would now have -$20,000 in equity, and you can’t borrow from a negative bank account.
If you were absolutely in love with the home and planned to stay there forever, negative equity wouldn’t hurt, but if you plan to borrow from your home equity to create an investment loan for yourself, this wouldn’t be a great scenario.
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How To Access the Equity in Your Chicago Home
There are three ways you can gain access to the surplus value in your home. Each way is different and has its own advantages and disadvantages.
Ultimately, you’re going to want to have a clear picture of your goals in mind to figure out what strategy is best for you and your family. Let’s go over some of the details of each option below. This way you can make the most informed choice and find the best solution for you.
You may hear the term HELOC thrown around in TV commercials and other media outlets. If you don’t know what it means that’s okay, you’re not alone.
HELOC is an acronym that stands for Home Equity Line of Credit (HELOC). This financial vehicle allows you to borrow from your home’s equity like a credit card. Each HELOC company will have their own rules, rates, and terms.
HELOCs work like credit cards. Whatever money you borrow needs to be paid back, but the major difference between a HELOC and an actual credit card is the interest rate. HELOCs typically offer much lower interest rates than consumer credit cards.
People like HELOCs because you can access only the funds you need, exactly when you need them. You’re not tied into a loan for a fixed amount. As long as the amount you’re borrowing doesn’t exceed your equity in the home, you’re good to go.
You can use this money to pay for anything from emergencies, medical bills, to home repairs. This is your money to use how you see fit.
Another popular option for borrowing cash from your home is a cash-out refinance. These are typically used as investment property loans.
When an investor buys a property, they are usually buying it at a discount. They will then put money into the property to fix it up. After that, it will be rented for profit.
There are some stipulations that borrowers need to follow when using a cash-out refi loan product. First, there is a seasoning requirement.
It doesn’t matter when an investor finishes their project. They have to wait 6 months no matter what before refinancing and cashing out their property.
Borrowers will also have to factor in LTV. LTV stands for loan-to-value. Banks or lenders in Chicago that offer cash-out refi products will only loan money at a certain LTV.
Let’s look at an example. Let’s say a property is worth $100,000 when it’s all fixed up. You buy that house for $30,000 and you put another $30,000 into the house in repairs. You are now “all-in” for $60,000.
Most banks will lend at 70% LTV. Some will go as high as 80%, but 70-75% is typical. So, if your bank lends at 70% LTV, and your house is now worth $100,000 because it looks brand new, the bank will give you $70,000.
This is enough to pay yourself and your investors back and make a $10,000 profit up-front. Investors will continue to rent the house after “cashing out.” That’s what makes this such a powerful investment loan.
A landlord can pocket $10,000 profit up-front to roll into their next investment deal and they will continue to control the property and rent it until they decide to sell.
Home Equity Loan
A home equity loan is similar to a HELOC but not exactly the same. You’re still borrowing against the equity of your house but this isn’t a line of credit. You get all of the money at once and have to pay it back over a period of time with fixed monthly payments.
The amount of your monthly payment is going to depend on the term of your loan (how many years) and home equity loan rates. The structure of these types of loans all depends on what you agree to with your lender.
Make sure to shop around and read the fine print before signing anything binding.
Unlocking the Power of Your Chicago Home
There you have it, everything you need to know to get started unlocking your home equity in Chicago. We hope you enjoyed this article.
We also hope you can now make an informed decision on the right product for you to tap into your home’s equity. If you have any questions about home equity loans or other loan products, contact us today. We’re happy to help in any way and answer any questions.