You are sitting on cash and don’t even know it. You bought your home years ago and have diligently paid down the loan. That means you have equity in the home and you can use it to fund your first investment property. But how do you access that equity and how do you use it to invest in a rental property. There are two ways to access that cash with a Home Equity Loan or a Home Equity Line of Credit (HELOC). What is the difference and which one should you use? Well let’s get into it!
What is equity and why should I care?
Equity is the difference of what the market value of your home is minus the loan amount that you still owe. That difference is the part of your home you own outright. And that can be turned into cash!
For example,if your home’s worth $400K and you owe $250K, you’ve got $150K in equity.
That’s dinero you can potentially use to invest in real estate and start building wealth and retire early.
Two ways to tap into your home equity
There are two main ways to turn that equity into usable cash:
The Home Equity Loan
Also known as a second mortgage. You find a lender and go through a similar process as you did with your first mortgage. At closing you receive a lump sum for the determined amount you are eligible for. This second mortgage is a monthly payment in addition to your first mortgage. It will also have different interest rate and terms which can be fixed or variable.
HELOC (Home Equity Line of Credit)
Think of this like a credit card backed by your house. You go through a similar process as a mortgage but instead of a lump sum, it is given to you as a line of credit. The difference is that you pay interest only on the amount that is used. And just like a credit card, you can pay it off and reuse multiple times during what is known as the draw period. A draw period is the time that you are allowed to access the funds (usually 5-10 years). During this time you only pay the interest. Afterwards, you enter the repayment period (about 10-20 years), where you pay interest and principle. The interest is usually variable.
Home Equity Loan vs HELOC
| Home Equity Loan | HELOC | |
| Type of Payment | One time use lump sum | Line of Credit (reusable) |
| Terms | Fixed or Variable Interest Rates Repayment (5-20 years) | Variable Interest Rates Draw Period (5-10 years) Repayment Period (10-20 years) |
| Pros | Does not change primary mortgage. Predictable Payments | Reusable Pay interest on only what is used |
| Cons | One time use Pay interest on whole sum regardless if used. | Interest can change. Requires discipline. |
So… how would I use one of these to buy a rental?
Let’s say you’re Cycle Breaker Carla, and from the prior numbers, you have a home that is worth $400k, but you still owe $250k. This means you have about $150k in equity. Remember a lender may only let you access up to 80% of the value of your home. Then you still subtract what is still owed on the loan and the left over is what you take home.
$400k x 80% = $320,000 but you still have the loan so… $320,000 – $250,000 = $70,000
With these funds you could:
- Take out a $70K home equity loan for a down payment on a duplex (or even two) and have money for a few updates
- OR like Lindsay did, use a HELOC to buy and fund a rehab house, then refinance it to pull your cash back out and repeat.
Either way, you’re leveraging an asset you already own to create another income stream. That’s next-level generational wealth energy. However, remember to have a strategy, an exit plan and to not over-leverage yourself.
Tips to use your equity wisely
Know your numbers
Because you are taking a debt, you want to ensure that it will be applied strategically to build wealth. This requires knowing your numbers.
- Calculate Your Equity: Get a free home valuation (Zillow, Redfin, or through a realtor). Determine how much you still owe on your mortgage.
- Investment Property: Know how much you expect to pay and how much cash flow you expect to receive. This requires researching your market and property analysis.
Remember that most lenders let you borrow up to 80–90% of your home’s value. This means you want to make sure that the funds you will pull out will cover the needed capital for your investment property.
Shop around
Talk to credit unions, banks, and online lenders. Compare:
- Interest rates
- Fees
- Repayment terms
- Draw period (for HELOCs)
Use it strategically
Ensure you have a real estate investing strategy. This includes knowing what and where you plan to buy. You want to make sure that after you close you are ready to use the cash. Remember it loses value, due to inflation, if it is sitting in your bank account. Therefore, create your investment strategy, buy and repeat.
But isn’t this risky? What if I lose everything?
I get it. It can be scary to put your primary at risk. Especially, after you worked so hard to buy it. But here’s the truth: there’s risk in doing nothing, too. That financial anxiety, can stop us from building wealth. They key is to reduce your risk by learning how to invest in real estate and strategizing and taking that leap. Because,
inflation is eating your savings. That equity? Sitting there doing nada.
It can feel reckless but it isn’t. You are building wealth and financial security for yourself. Imagine where you will be in 5-10 years? Working less? Traveling? Whatever it may be, now it is time to use your home equity to build that dream.
Ready to start investing in real estate but don’t know how or where to start? Check out my Keys to C.A.S.H.F.L.O.W: Rental Property Bootcamp and take the first step towards your dream life!
