Should You Use a HELOC to Make an Investment?
When people look to invest, they often just look at the cash they have on hand disregarding the biggest asset they have: their home. Right now, home values have shot up reaching record highs. Which means that it could be the perfect time to use home equity for investment opportunities. How do you access that equity? Let’s take a look at 3 options for accessing home equity:
Home equity loan
Home equity loans, sometimes referred to as second mortgages*, are commonly used to help pay off bills or renovate the home. Essentially, it pulls value out of home and trades it for other things like a dream kitchen or a lavish vacation.
This type of loan requires an assessment of the value of your home versus what you owe, which is referred to as the loan-to-value (LTV) ratio. A common loan-to-value percentage that you will hear about is 80% because if you owe more than 80% of the value of your home then you will be looking at paying private mortgage insurance (PMI) as part of the loan. This is because the higher the LTV ratio, the higher the risk the mortgage is for the lender. However, as soon as you have 20% equity in your home, the insurance dissolves. Some lenders will lend up to 90% of the value of your home. This means if your home is valued at $500,000 and you owe $300,000 on your mortgage, this will allow you to get a loan for $150,000, bringing the total leverage on the home up to 90% ($450,000) of the home’s value.
This is one of the most popular ways to access home equity. Cash-out refinancing involves refinancing your existing mortgage by taking out a new loan for a higher amount than you currently owe. This will also depend on your income level and the value of your home, but many people like this option because once complete, they still only have a single payment.
Many people have refinanced lately because the rates are so low—how could you pass up that deal?
For example, let’s say your home is worth $400,000 today and you owe $200,000 to your mortgage company before the loan is fully paid off. This gives you $200,000 in equity. Let’s say you want to pull up to $80,000 in equity from your home. You could use a cash-out refinance to take out a $280,000 loan (your current $200,000 mortgage plus $80,000 in equity) and make monthly payments on the new loan. If the rates have gone down enough, you could not only have $80,000 to spend however you want, but you could very well end up with a lower monthly payment because of a more favorable rate.
Home equity line of credit (HELOC)
A HELOC is our method of choice and one used most often by our clients. It is a revolving line of credit that utilizes the equity you’ve built up in your home. It’s different from a home equity loan or cash-out refinance because it is a line of credit that stays available, so you can use it whenever you need the funds, and you only pay for what you have used, not what is available.
Think of it like a credit card. You’re given a borrowing limit that you can choose to spend or not at a given interest rate.
HELOCs are great for a number of reasons:
They offer comparable interest rates to what you would expect from a mortgage because they still use your home as collateral.
There is no PMI for a HELOC that allows you to go above 80% LTV.
You are not charged interest for any money you are not using.
As you make your payments it replenishes, freeing up the use of the money again if you are still within the draw period.
Savvy investors use HELOCs often because they cost so little to get and it’s helpful because most people don't have $50,000 or more sitting in their bank account.
Pro tip: The interest that you pay on a loan is referred to as the cost of that money. If you can make more with that money than it costs, then it's a great candidate for use!
Why use a HELOC?
In some situations, it can be convenient to have access to the equity in your home and have quick access to funds. A HELOC can be used to:
Help with a down payment
Purchase a property with cash
Invest in real estate
Cover tuition payments for education
Upgrade and renovate your home, and so much more!
How Hedgehog Investments makes the process better than ever before
Hedgehog Investments makes it easier to leverage the best asset that you have on hand: your home. One reason many people don’t use the equity in their home is because it costs money (and a lot of it). Right now, if you were able to pull $100,000 from your home it would cost you several hundred dollars a month to cover that cost. For many this is prohibitive, and this is where Hedgehog can help the most.
We provide fantastic returns for low risk, and cover the cost of the money to get started.
This is possible because we’ve built our model based on the principle of compounding growth. This means that if you leave your money with us it grows at an increasing rate every year. For example, if you get a 12% compounding rate, in 10 years, the average annual rate will actually be above 20%.
Since we can leverage our funds so well—and our investors provide the funds to expand our services—we agree to cover the cost of money, if there is one, that they bring to us. This means that if a client uses a HELOC (or other mechanism) to invest with us, we will make the payments for them! The amount we pay will eventually be taken out of the account on the backend, but you get to make money on the difference. Essentially, your investment with Hedgehog pays for the use of that money without the need for up-front payments.
So, if you leave the money with us for long enough, you’ll essentially double your equity AND as your account with us grows, the average rate of return grows over time. It’s like triple dipping!
Take a closer look at how our model works.
*While a second mortgage is a home equity loan, it is technically only one type of home equity loan. For more information it’s best to talk to your lending institution of choice to get more details about the products that they offer.
This material is intended for informational purposes only and should not be construed as legal or tax advice. Information here is not intended to replace the advice of your investment advisor or financial advisor. This information is not an offer or a solicitation to buy or sell securities. This information may have been compiled from third-party sources and is believed to be reliable. All investing involves risk, including the loss of principal.