Equity Loan For Investment Property – If you’re a homeowner and at least 62 years old, you can convert your home equity into cash to pay for living expenses, health care costs, home remodeling or anything else you need. This option is a reverse mortgage; However, homeowners have other options, including home equity loans and home equity lines of credit (HELOCs).
All three allow you to sell or tap your home equity without leaving your home. However these are different loan products, and it pays to understand your options so you can decide which one is best for you.
Equity Loan For Investment Property
A reverse mortgage works differently than a forward mortgage – instead of paying the lender, the lender pays you based on a percentage of your home’s value. Over time, your debt grows—as you make payments and accrue interest—and your equity shrinks as the lender buys more and more.
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You continue to hold title to your home, but as soon as you move out of the home for more than a year (even for an involuntary hospitalization or nursing home stay), sell it, or die — or become a delinquent on your estate. Taxes or insurance or the house falls into disrepair – the loan is due. The lender sells the home to you to collect the money paid (plus fees). Any equity left in the home goes to you or your heirs.
Carefully study the types of reverse mortgages and make sure you choose the one that works best for your needs. Check the fine print with an attorney or tax advisor before you sign. Reverse mortgage scams that seek to steal your home equity often target older adults. The FBI recommends not responding to unsolicited ads from people claiming to give you a free home and accepting payments from people for a home you didn’t buy.
Note that if both spouses are named on the mortgage, the bank cannot sell the home until the surviving spouse dies—or the tax, repair, insurance, moving, or sale-of-home conditions listed above occur. Couples should carefully examine the surviving-spouse issue before agreeing to a reverse mortgage.
There can be other drawbacks as well, including higher closing costs and the possibility that your children may not get the family home if they default on the loan. Interest charged on a reverse mortgage typically accrues until the mortgage is paid off.
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Mortgage loan discrimination is illegal. If you believe you have been discriminated against based on race, religion, gender, marital status, use of public assistance, national origin, disability or age, you can take action. One such step is to file a report with the Consumer Financial Protection Bureau or the US Department of Housing and Urban Development (HUD).
Like a reverse mortgage, a home equity loan allows you to convert your home equity into cash. It works like your primary mortgage—in fact, a home equity loan is also called a second mortgage. You get the loan as a lump sum payment and make regular payments to cover principal and interest, which is usually a fixed rate. Unlike a reverse mortgage, you don’t have to be 62 to get one, and you have to start repaying the loan as soon as you take it out.
With a home equity line of credit (HELOC), you have the option to borrow up to the approved credit limit as needed. In that respect, a HELOC works like a credit card.
With a standard home equity loan, you pay interest on the full amount of the loan, but with a HELOC, you only pay interest on the money you actually borrow.
Investment Property Loans
A fixed interest rate on a home equity loan means you always know what your payments will be, while a variable rate on a HELOC means the payment amount varies.
Currently, the interest you pay on home equity loans and HELOCs is not tax deductible unless you use the money for home renovations or similar activities on the residence to secure the loan. Prior to the Tax Cuts and Jobs Act of 2017, interest on home equity loans was all or partially tax deductible. Note that this change is for tax years 2018 to 2025.
Additionally—and this is an important reason to choose—with home equity loans and HELOCs, your home is an asset to you and your heirs. However, it is important to note that your home acts as collateral, so if you default on the loan you risk losing your home to foreclosure.
Reverse mortgages, home equity loans and HELOCs all allow you to convert your home equity into cash. However, they differ in terms of distribution and repayment, as well as in terms of requirements, such as age, equity, credit and income. Based on these factors, here are the main differences between the three types of loans.
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Reverse mortgages, home equity loans and HELOCs all allow you to convert your home equity into cash. So how do you decide which type of loan is right for you?
In general, a reverse mortgage is considered a good option if you are looking for a long-term source of income and don’t mind if your home is not part of your estate. However, if you are married, make sure the surviving spouse’s rights are clear.
If you need short-term cash, can make monthly payments, and prefer to keep your home for your heirs, a home equity loan, or HELOC, is considered a good option. Both have significant risks along with their benefits, so thoroughly review the options before taking any action.
HELOCs and home equity loans often have little or no fees and little or no closing costs compared to reverse mortgages. Reverse mortgages have mandatory counseling sessions and typically have much higher closing costs than conventional mortgages.
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Reverse mortgages will take the longest to process with mandatory counseling sessions, closing disclosures, etc. HELOCs typically process a little faster than home equity loans, with many lenders advertising closing times of less than 10 days. By comparison, most home equity loan lenders advertise a processing time of two to six weeks.
Home equity loans and HELOCs both have credit and income requirements for approval. Good credit is not required to be approved for a reverse mortgage, but you will need to prove your ability to maintain the property and pay your taxes and insurance bills. If you can’t prove enough to get approved for a standard reverse mortgage, you may be able to get a single-purpose reverse mortgage through a local nonprofit or government agency.
Reverse mortgages, HELOCs and home equity loans all have their place. If you need cash temporarily, have the income and credit to approve, and are planning to leave your home to your heirs, a home equity loan or HELOC may be a good option for you. If you are already retired and need to supplement your income, don’t want to downsize and don’t want to leave your home to your heirs, a reverse mortgage may be the best option for you.
Authors need to use primary sources to support their work. These include white papers, government statistics, original reports and interviews with industry experts. We also refer to original research from other reputable publishers where appropriate. You can learn more about the standards we follow to produce accurate, fair content in our editorial policy. For many homeowners, the equity they build in their home is their largest financial asset, typically comprising more than half of their net worth. However, confusion remains about how to measure home equity and the tools available to incorporate it into an overall personal financial management strategy.
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A three-part article explaining home equity and its uses, ways to tap into it, and specific home equity options available to homeowners 62 and older. NRMLA has also developed an accompanying infographic to help explain home equity and how it can be used.
Americans hold large amounts of equity in their homes, according to consulting firm Risk Span. What a total, $20, 100, 000, 000, 000. That’s 20 trillion, 100 billion dollars! And when we say “untapped”, we mean that the equity is not currently happening
, or useful – until you try to extract it. Taking equity out of your home is one way to make this good asset liquid and usable.
Home equity can both be tapped and used in a variety of ways. Which path is most beneficial depends on the homeowner’s personal circumstances, such as age, wealth, financial and family goals, and work or retirement status.
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Home equity may be your largest financial asset; the largest share of your personal assets; And your protection against life’s unexpected expenses.
In “accountant-speak,” equity is the difference between the value of an asset and the value of the liabilities against that asset. In the case of home equity, it is the difference between the current market value of your home and the money you owe on it.
Let’s say, for example, your house
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