Using Equity in my Home

[Roland Brown]

I am new and looking for ways to ear mark capital for Investing

I have roughly $100K in home equity.  Are there specific ways I can go about using that equity to start investing?  Would this be a generic refinance, a home equity loan, something else I am not aware of?

What are the Pros and Cons?

Also, as a newbie, I am anxious about messing up and having a second home that ends up being worthless, can I do anything with the equity such as short term lending  while I build up my network and learn the real estate business?

[Moshe H.]

Hi Roland, I have recently done the exact thing you're asking about. I have also not yet deployed my cash while I look into which investments to do.

Here are the results of my looking into it. Take it as one man's opinion 😀

I went the "cash-out refi" route.

Pros: Lower interest rate. I simultaneously refinanced my entire primary mortgage at a better rate, but only 0.25% lower than before, so it would not be worth doing that on its own, but for the cash out to reinvest, this is a little added bonus. My refinance rate is about 1% less than the rate I was quoted for a home equity line of credit (HELOC).

Cons (actually take these as pros for HELOC): I am taking the money all at once. That means that as long as I'm sitting here analyzing my options, I'm paying interest on my money sitting in the bank. So even though I put it in a savings account that pays me 1%, I am still paying net 2.75% for the privilege of having a lot of cash to pounce on a deal when it comes up. On the other hand it makes me motivated to actually go out and do something rather than analyzing forever.

I have to make principal payments every month on my refinance. A HELOC will allow you to pull out money as needed, only pay interest on the money that you pull out of your line of credit, and then for the entire draw period of the line of credit, you can choose to make interest-only payments, typically for ten years. Since it is a revolving line of credit, you can also pay principal down and then take the money out again as you wish. If you are making short or medium term investments, then you may never have to make a principal installment payment, because when you exit the deal, you can just pay back all the principal before the end of the draw period. So this could potentially increase your cash flow. I also remember hearing somewhere, probably here on BiggerPockets, that if your lender likes you, then you can renegotiate at the end of the term and extend it so that you don't have to begin repayment of the principal for an additional 10 years or whatever agreement you come to.

At the end of the day, it may have actually worked out better for me to do a line of credit instead of a refinance, but I was attracted by the thought of refinancing my entire mortgage at a lower interest rate. After I went through the whole closing process and I saw how much money I was paying for it (esp. in NY!), I realize that the lower quarter percent in and of itself was definitely not worth refinancing. That said, don't actually regret it and now I do have the money sitting right in my bank account to just write a check the moment that I need it.

OK, I have to run but there's probably more to be said on this!