By Paul Branton, Director of Investor Services
0%. Zero Percent! That is what you are earning if you have money in a piggy bank.
That may be fine for my kids as they save up twenty bucks for a hamster (that I secretly hope we never get) but it is still commonly accepted that a zero percent return is a bad idea. Sadly, that is exactly what we are doing as we let the equity in our homes sit idle instead of putting that money to work. If you are currently in this position, I would like to challenge you to BREAK OPEN the PIGGY BANK and turn your investment property into a CASH COW!
In recent months, we have seen mortgage rates hit ALL TIME RECORD LOWS… but they are expected to begin increasing this year. While increasing interest rates is not exciting news, the forecast for property values in our market is that they are also going to keep increasing… some sources estimate by as much as 6-10% by the end of this year. Wow!
Put simply: LOW INTEREST RATES AND HIGHER HOME VALUES = A GREAT TIME TO REFINANCE!
If this CASH COW thing sounds appealing to you… you might be wondering to yourself: “How exactly do I get that money out of the house?” Great question! That is where refinancing comes into play. But instead of a traditional refinance where you only borrow the amount you currently owe and set new loan terms, you will do a “Cash-Out Refinance”. This means that you are taking out a new mortgage with a higher balance.
So, do you want to know how much money is available to you in the piggy bank? That amount is known as the equity. To determine equity, you calculate the difference between the appraised value of the property and the balance owed. For example, if you have a property that is worth $250,000 and you owe $150,000, you have $100,000 in equity. Now wait a second before you get too excited about the idea of getting your hands on $100,000.
In the example above, if your property is worth $250,000, most lenders would be willing to let you borrow up to 80% of that value or $200,000. This is called the “Loan to Value” ratio or “LTV” for short. This guideline in lending serves as a safeguard for both the lender and borrower in the event property values decline or the borrower stops paying.
Okay, now that we know the bank would lend $200,000 and you presently owe $150,000, that means that you could borrow as much as the $50,000 difference.
What could you do with that $50,000?
- Improve your property to increase the rental rate and address deferred maintenance?
- Put 20% down on another rental investment property?
- Pay off higher interest debts?
In my opinion, all of the above are great options as ways to put your equity to work for you! If you have not refinanced recently, there is no time like the present!
If you would like to discuss this further and determine the best strategy for you, give me a call and we can run the numbers together.