How to Use Home Equity to Finance a Business
You’ve probably heard the statement that a home is the biggest investment most people will make in their lives.
The reason your home is considered an investment is because of the equity that builds up over time. Both because you’re paying your mortgage every month and because over time home values usually increase.
But unless you sell your home, it’s not really your cash to use freely.
Did you know that you can pull out the cash in your home and use it to fund another investment, such as a business?
Let’s take a look at how to use home equity to finance a business, and how to find a reputable hard money lender to help you access the cash that’s trapped in your home.
How to use home equity to finance a business
Home equity is the cash that builds up in your property as you make monthly payments on your mortgage.
To access it, you’ll have to either sell your home or borrow some of it with a home equity loan.
Selling your home of course isn’t often the solution, because you still need a place to live.
A home equity loan allows you to remain in your home and continue making your monthly payment on your first mortgage while you access the cash with a second mortgage.
Let’s take a look at the steps you’ll need to take to use your home equity.
What’s your loan scenario?
1. Calculate your home equity
To calculate the equity in your home, subtract the remaining balance on your mortgage from the current property value.
For example, if your current property value is $400,000 and your remaining balance is $350,000, you have $50,000 of equity in your home.
You usually can’t take out the full amount with a home equity loan, but you’ll take out a portion of it based on the lender’s required loan-to-value ratio (LTV).
While it’s only a portion of the equity, it still may be a significant amount of cash depending on how much equity you have in your home.
2. Find a lender
Traditional lenders such as banks offer home equity loans, but it can be difficult to qualify.
Banks have strict lending requirements for these types of loans, and they want to make sure the borrower has a good credit score, high income, and low debt before they’ll issue a loan.
However, there are plenty of borrowers who are unable to meet these requirements yet still are more than able to qualify for a loan.
That’s where private money lenders come in.
Marquee Funding Group is a private money lender that makes decisions based on the overall merits of the deal, rather than specific requirements.
We are more interested in your business goals and whether the deal makes sense.
3. Determine how you want to use your funds
The best part about using home equity for your business is that you can use the funds however you choose, including:
- Leasing or purchasing space
- Purchasing equipment, materials, or inventory
- Paying staff wages
The most common ways to access equity for business purposes are with a home equity loan, home equity line of credit (HELOC), or a cash-out refinance.
Home equity loans and HELOCs are considered second mortgages because you take them out in addition to your original loan, while a cash-out refinance loan replaces your original loan.
However, Marquee Funding Group can fund cash-out loans in the 2nd, 3rd, and even 4th position—which means you don’t have to touch your first mortgage.
Pros and cons of using home equity for your business
As with any lending scenario, there are certain risks to using a home equity or cash-out loan.
Let’s take a look at the benefits and drawbacks of taking cash out to start a business.
Pros of using your equity for your new business
- Fast and easy to qualify with a hard money lender
- Potential to borrow a significant amount of cash
- Lower interest rates than personal or business loans
Cons of using your equity for your new business
- Your home is at risk if you can’t repay the loan
- You must be a homeowner to build and access equity
For many people, using home equity to fund your business is a simple, straightforward way to move ahead with your goals.
Financial experts have always cautioned borrowers against using home equity for projects that have no return on investment.
However, many experts do recommend putting your home equity back into your home with improvement projects or using it to fund another investment.
Using your home equity for business purposes is a perfect use of the funds because you’re investing the cash in another space.
Is a home equity loan better than a business loan?
If you’re trying to start a new business, wouldn’t it be better to just get a small business loan?
Unfortunately, it can be difficult to borrow money with a business loan unless you can meet strict credit and business income requirements.
If you’re just getting your business off the ground, it can be impossible to produce the documentation banks require for this type of loan.
Most banks will need to take a look at the following for a business loan, including the popular Small Business Administration loan:
- Financial statements, including annual business income
- Business and personal credit score
- Personal and business tax documents
- Other business documents
- Business plan
A new business owner most likely won’t have most of this documentation, let alone strong enough scores to cut it.
Home equity loans can help borrowers get their new business off the ground, without the need for extensive documentation.
How to find the right lender to help you cash out your equity
If you want to tap into your home’s equity for your new business, Marquee Funding Group can help with a cash-out loan.
Unlike other lenders who offer cash-out loans, Marquee can help borrowers tap into their home equity without requiring them to pay off their current mortgage—or give up a good interest rate.
We can fund cash-out loans in the 2nd, 3rd, or 4th position, so your first mortgage can remain intact.
We offer our borrowers a wide range of lending options, including:
- Loan-to-value up to 70% (deal specific)
- Loan amounts from $50,000 to $20 million
- Purchase money, rate-and-term refinance, and cash-out refinance
- Owner-occupied or non-owner-occupied consumer or business purpose loans
- Single-family, multi-family, commercial, industrial, construction, and land loans
- Ground up fix-and-flip or fix-and-occupy loans
Hard money lending is ideal for many borrowers, including small business owners, self-employed borrowers, fix-and-flippers, real estate investors, or any borrower who might have a difficult time proving to traditional lenders that they qualify.
Submit your loan scenario today to the expert loan officers at Marquee Funding Group.
We can help you find a solution to your unique lending scenario with our flexible, down-to-earth approach to hard money lending.