Mortgage Financing: Mini Series - Part 5 » Toronto Condos, Toronto Lofts, Radu's Toronto Real Estate Blog

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Mar
06
Mortgage Financing: Mini Series - Part 5
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Mortgage Financing

Mortgage Financing: Mini Series - Part 5

In Mortgage Financing: Mini Series - Part 1, we looked at Credit Bureaus. In Mortgage Financing: Mini Series - Par 2, we looked at Mortgage Terminology. In Mortgage Financing: Mini Series - Part 3, we explored Pre-Payment options the benefit of reducing your Mortgage burden quicker. In Mortgage Financing: Mini Series - Part 4 dealt with Pay Off Faster Strategies. Part 5 will wrap up this Mortgage Financing: Mini Series with a look at Home Equity and at some general questions you may have about mortgages.

Home Equity

Home Equity Lines of Credit have become a major source of lending for banks. A Home Equity Line of Credit is essentially a secure line of credit using your home as collateral. It is generally possible to access up to about 90% of your home’s appraised value as a line of credit. Therefore, if you have a home that has already been paid off, and is worth, for example $300,000, you can conceivably access about $270,000 of credit from a lending institution.

What if you have not paid off your home? Say you have only paid off 50% of your mortgage, are you still eligible for a Home Equity Line of Credit? The answer is YES. In this case, you may be eligible for 90% of the 50% already paid. Therefore, if you have paid $150,000 down on your $300,000 mortgage, you may qualify for around a $135,000 line of credit.

Home Equity Investments

Perhaps you are interested in purchasing a second property, maybe an investment property or perhaps a vacation home. What if you do not have a down payment available? If you’ve already paid off a significant portion of your current mortgage, it is perhaps a good idea or a good investment plan to take out a Home Equity Line of Credit and use it either as a down payment on a second property, or perhaps as a new mortgage.

Many so called “Real Estate Gurus” and self-made Real Estate millionaires swear by this method. The Home Equity financing or 2nd mortgage financing options have been great for such investors. It allows the well informed investor to use his properties as collateral in order to get access to new capital which will allow the investor to buy yet more real estate.

For Example, Joe Millionaire decides to purchase a home. He gets a first mortgage and starts to rent out his property. Since he is paying off his mortgage from the rental income, he has little expense in carrying that home. After five years, Joe Millionaire decides to get a Home Equity Line of Credit based on his first home. For the last 5 years, he has been paying off the first mortgage and has thus began accumulating home equity, both by paying off the mortgage and by the increases in value of his property. Joe therefore will use the Home Equity Line of Credit as a down payment on a second home.

He afterwards rents this new home as well and pays it off much the same way. Every few years, Joe Millionaire does this over and over until he has accumulated a portfolio of real estate properties on which he has paid little if no money of his own. Thus, Joe Millionaire becomes wealthy by using sound real estate purchasing methods with equally secure and sound financing options.

PDF Icon Unlock the Door - Home Equity: Download the Home Equity Printout.