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Best Ways to Tap Your Home Equity for Investing

February 2024

Are you interested in diversifying your portfolio by investing your home equity? You don’t have to sell your home to put your equity to work.
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Whether you are looking to buy an investment property, diversify your assets away from real estate, or maybe invest in your business, there are several ways you can access your home's equity for investing. These include shared equity agreements, a cash-out mortgage refinance, and home equity lines of credit (HELOCs).

Sell a share of your equity

Shared equity agreements are probably the most flexible method to tap into your home equity for investing. Here is our list of the top-rated shared equity agreements.
Shared equity agreements don't require getting into debt or even monthly payments because you're selling a slice of the future equity of your home. When your home is sold (or when the contract term ends), the investors receive their share from the sale. If the value of the house increases, so does the amount the investor receives. If the house drops in value, the investor also shares in the loss.
These strategies are not for everyone and there are risks attached. However, as a homeowner you do have the option of using your equity to help you reach your financial goals.

Cash out with a mortgage refinance

A cash-out refinance is a new mortgage for a larger amount than you currently owe on your home loan. The lenders give you the difference between your current mortgage balance and the balance of the new home loan in a one-time payment.
Mortgage rates are usually the lowest available for home equity financing. You can save a lot of money if you qualify for a low interest rate because mortgage rates have dropped or your credit score has improved. A cash-out refinance is particularly attractive if you are refinancing an FHA mortgage that requires you to pay mortgage insurance premiums for the life of the loan.
Compare multiple lenders before you make a decision. A recent study by Freddie Mac showed that borrowers save $3,000 on average when they compare the quotes of at least five lenders.

Open a HELOC

Home equity lines of credit (HELOCs) are a type of second mortgage that uses your home as collateral. The main difference is that instead of restricting you to a lump-sum, HELOCs allow you to withdraw money when and as you need the funds, just like a credit card.

Pros and cons of using home equity to invest

Here is a list of the benefits and the drawbacks to consider.
  • Can help you diversify a real estate heavy portfolio
  • Relatively low cost leveraging of your assets
  • Easier to qualify for a large amount to fund larger investments.
  • Removes cash flow risk by accessing equity for another investment, such as another property, without increasing monthly payments (if you use shared equity)
  • Allows you to use your home equity to put a down payment on a property that generates income.
  • You need to yield a higher return than the interest expense associated with the home equity financing to make a profit
  • You don’t earn on the appreciation of the equity you take out, if you sell a slice of your equity. So you risk earning less with your investments than your real estate appreciation
  • Risk of losing your home if you are unable to repay the loan as scheduled

What next?

Using equity to invest may sound risky — and it can be — but leveraging assets is common among investors.
In the right hands, home equity is an inexpensive source of capital that can help you achieve your financial goals.
Run the numbers, and get quotes from several home equity investors and lenders to see which one offers the best deal.

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SuperMoney is the most comprehensive financial services comparison site around. We have published hundreds of personal finance articles and provide detailed reviews on thousands of financial products and services. Our unbiased advice and free comparison tools help consumers make smart financial decisions based on hard data, not marketing gimmicks.

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