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
Everyone has been halfway right so far.
The equity is the difference between what you owe in the house and what the home is worth on the open market/appraisal.
A bank will offer to provide you with a loan for typically 70-80% of that value difference. So if you have 10k equity, you could only get a loan for 7-8k. This amount varies by bank. The lender then takes second lien position on your home, and in the event you ever sell, or have to claim a full loss on the property they will collect whatever money is left over after the primary lien holder is paid off, up until the debt is fully satisfied.
You don’t want to leverage too much of that equity for various reasons, including limiting your future profits from any sale as well as limiting your liability in the unlikely event your home value decreased.
You also could take what’s called a home equity line of credit or HELOC. This is basically the same as a loan, only the credit is open like a credit card. Use only what you need when you need it and pay back what you used like you would a credit card.
It should be noted that neither a HELOC or loan have to be with the same bank that you have your original mortgage with.
You can also do a cash out refinance, but unless you get a lower interest rate, it’s not very advantageous to do after such a short time owning the home. For starters, you have to pay closing costs as if you were buying the house all over again.
Latest Answers