Understanding Financing Terms

How to Use Your Home's Equity to Buy a Rental Property

Are you considering investing some money in a rental property? Investing in rental properties is one option you can use to make extra money, but you will need to find a way to pay for the property. If you own a home and have equity in it, you could use the equity to fund your project. Here is an explanation of how to use an equity loan to buy a rental property.

Determine the Amount of Equity You Have in Your Home

The first thing you might want to do is to check your loan balance. Finding out how much you owe on your home is the first step in finding out how much equity you have. The second thing to do is to determine your home's current value. The equity is the difference between these two amounts, and you can borrow this money if you have enough. Most banks will loan up to 80% of a home's value. If you currently own 60% of your home's value, you might be able to borrow up to 20% more. The exact amounts depend on the value of your home and its equity amount.

Find a Rental House to Purchase

If you have enough equity in your home, you can borrow the money from it to use as your down payment for a rental house. You will need to start looking for one to buy if this is the case. You may want to stick with a small house to buy as your first property, as this would be more affordable to purchase.

Get a Loan to Finance the Rest

Next, you will need to apply for another loan if your equity loan is not enough to pay for the entire property. Getting a second loan will be easier if you have a lot of equity to use from your current home, as you will not need to borrow as much for the purchase. Many banks offer various types of rental property loans for people who want to purchase properties to rent, but you might have to talk to several lenders to find the right loan. You can learn more by talking to the lender that will issue you an equity loan.

Using your home's equity is an excellent way to get into the rental property business. If you have equity in your house and good credit, apply for an equity loan today.