Grow Your Assets
literally, at home.
Real estate is unique in that property owners have considerable borrowing power. The key here is that owning an asset makes you a safe bet for lenders - they know that the asset is, in effect, money that you already have.
How Equity Financing Works
The portion of your home that you own is called equity - the value of your home less the amount you owe on your mortgage. For example, if you own a home that is valued at $300,000, and you owe $100,000 on your mortgage, your equity can be calculated as:
Current value of home ($300,000) minus the amount owed
on mortgage ($100,000) = Your current equity ($200,000)
Equity financing allows you to raise a substantial portion of your $200,000 equity. Your Capital Direct mortgage planner can calculate your lendable equity for you - the figure used by financial institutions to determine how much of a loan you are eligible for.
Rising real estate prices can improve your equity position. If your $300,000 home appreciates to $350,000, that adds $50,000 to your equity, regardless of what you paid for the home.
Of course, your ability to borrow a substantial portion of your equity depends on you having the resources to pay back the loan. Going into debt, regardless of the value of the asset you are acquiring, is a serious responsibility. When you assess your borrowing power, you should also look at your family budget, and determine how much loan payment you will be comfortable making per month.
Your borrowing power allows you to use one of the most powerful investment strategies available. The strategy is called leverage, after the principle of using a small force to create a much larger force. Leverage is one of the governing principles of growing a real estate portfolio.
Here's how it works. Let's say that as a homeowner, you are able to borrow $100,000. If you use the $100,000 as a down payment, you can finance a property worth $400,000. Suppose that over the course of a year, the property you acquire appreciates by 15% to $460,000. This means that your $100,000 investment would have netted you a profit of $60,000 in one year - a return of 60%.
Few investments can get you this kind of bang for your buck, and it is this principle that has built many real estate empires. Leverage, however, has big downsides as well as upsides, so you should know your market well (See Strategy #5) before taking action. Finance Your Next Move
The equity in your home and your ability to pay off a mortgage will determine the size of your war chest - the amount of funding you can raise to expand your real estate portfolio. A conservative approach is to allow for a 25% down payment. Therefore, if your lend-able equity qualifies you for a loan of $75,000, you could use that as a down payment for a property worth $300,000. Or, you could finance a $75,000 renovation.
Consider Your Financing Options
As a homeowner, you have a number of options when it comes to lenders, and your local bank may not be your best choice. If you don't fit the typical borrower profile that banks like to see, you may have to jump through a number of hoops before you can get financing. At Capital Direct, we see things differently. Our view is that if you have equity, this is wealth that you have created, and this is the primary factor we consider when we authorize loans.
Capital Direct also believes that getting a loan that meets your exact needs involves more than selecting a product from a price list. Financial knowledge and an understanding of real estate markets are critical to making the correct match. This is where the mass-market approach used by the Major Banks falls short. Our approach, by contrast, is based on a one-to-one relationship between yourself and a Capital Direct mortgage planner. Your mortgage planner is fully qualified to help you chose the loan product that best suits your individual circumstances and long term goals.
Web site content is for informational or illustrative purposes only and is not be considered or used as a substitute for professional financial advice from an accountant, lawyer or certified financial planner. Click here to view our full legal disclaimer.