My partner and I bought a home for $122k around a year ago from his family, it appraised at $190k during the inspection and loan process. It is an older home and we’d like to do renovations and eventually sell it.
We don’t have money for renovations currently, but know that Home Equity Loans exist but nothing else.
How does it work?
In: Economics
If you own an asset worth $190k, you can take out a loan with the asset as collateral. Banks generally want no more than 80% of the value of the asset to be leveraged, so up to $152k could be borrowed against. If you purchased the house at $122k and took out a mortgage for 80%, that would mean you borrowed $97.6k and put up $24.4k plus transaction costs to close the deal.
In this case because the value is higher than when purchased, the loan against the property is now only worth 51% of the value, and you have about 49%, or $92.4k of equity that you can borrow against. Now it’s worth noting that banks are fairly conservative. As we noted before, you can only borrow against about $50k of that. The bank wants you to have a cushion so that you take the loss and not them if the value ends up being less than appraised, or the market has a downturn. Also, they really just want you to pay them, they don’t want your house. So if you can’t prove that you can comfortably pay the new loan plus your existing mortgage on your salary, they won’t lend to you, regardless of equity. Ditto if your credit is sub-par. Lenders will be more stingy on home equity lines of credit than they will be for primary mortgages.
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