If you own real estate, you need to understand how to leverage your equity. A strong grasp on how to utilize your investment can help you make, keep, and save money. There’s a reason why investing in real estate has long been considered a smart financial strategy—as time goes on, you’ll have the option to start leveraging your equity.
Let’s take a look at how it’s done:
Key Terms:
Before you go any further, you need to add a few key terms in your financial vocabulary:
- Leveraging – A simple definition of leveraging is using borrowed money to invest in property. Both companies and individuals use leverage to buy properties, and the most common form of leverage is a mortgage. Leveraging allows investors to purchase properties that cost more than the cash they have on hand. Although leveraging is essentially acquiring debt, it’s unique in that it’s often taken on with the expectation of a financial return.
- Equity – Equity is essentially assets minus liabilities. In the real estate world, equity refers to the difference in the market value of your property and the amount of money you owe on that property. Every time you make a mortgage payment, you’re increasing your equity because you’re reducing the amount of money you owe. In real estate, your equity can actually be more than the amount you’ve paid towards your mortgage, since real estate value tends to appreciate over time.
- Refinancing – Refinancing means you’re replacing one form of debt with another, but with different terms. In essence, you’re paying off your first mortgage with a second one, usually in the hopes of negotiating a more advantageous rate, or to tap into equity you’ve already acquired.
Table of Contents
Common Reasons for Leveraging Real Estate Equity
Leveraging the equity on the real estate you already have is a practical choice for many owners and investors. Doing so means using the money you’ve already invested in your property to access fresh funds. This can be useful in a variety of situations, such as:
-
- Purchasing a second (or third, or fourth, etc.) property – For the investment-minded individual, leveraging the equity on your current real estate assets can allow you to expand your portfolio, even when you don’t have the cash for a new down payment upfront. Just be sure to crunch the numbers in order to determine if this is a sustainable investment you can afford in the long term.
- Paying off debt – If you’ve accumulated a lot of debt, using your equity can help you consolidate, which can save you money on interest—especially if you’ve racked up debt on high interest credit cards.
-
- Home Renovations – Using leveraged equity to pay for major home improvements like installing a backyard pool can actually make you money in the long run. If the improvements significantly raise the value of your property, you’ll sell for more.
- Dealing with an unexpected situation – If life throws you a curveball, you might need to access a large sum in order to handle the financial burden. Sticking to a budget isn’t always enough to protect you from issues like medical emergencies or unforeseen home repairs.
How to Tap into Your Equity
Now that you understand the basics of leveraging your real estate equity, let’s take a look at a few of the options available in terms of accessing money when you need it:
- Home Renovations – Using leveraged equity to pay for major home improvements like installing a backyard pool can actually make you money in the long run. If the improvements significantly raise the value of your property, you’ll sell for more.
- Home Equity Line of Credit (HELOCs): HELOCs are great options when you need a short-term loan. They can be viewed similarly to a credit card because they allow homeowners access to the funds they need, when they need them. The differences is they are backed by the collateral owners have in equity. Additionally, they’re usually offered with much lower interest rates.
- Cash-Out Refinancing: Cash-out refinancing is when you replace your first mortgage with a second mortgage that’s worth more than your first one, meaning you’ll receive the difference as a lump sum in cash. Not only will cash-out refinancing provide you with relatively quick access to funds, but it can also lower your interest rate. This is especially true if you are eligible for national programs like a VA cash out loan.
Understand the Risks
Although leveraging your real estate equity can be highly beneficial in many circumstances, doing so also comes with a certain level of risk. If you over-leverage, and can’t pay off your debts, the consequences could result in bankruptcy. Just be sure to do your homework, get help if you need it, and take the process seriously!
