Using Home Equity & HELOC To Buy Presale Property
Are you thinking of refinancing your home? Want to know if it makes sense to maximize the value of your home equity in order to buy pre-sale condos? It’s a good idea. Here’s why.
Saving for a large down payment for another presale property can be hard and feel like it takes ages. Using your home’s appraised value to make the down payment for another property is the most efficient way of doing so.
What is Home Equity?
Home equity, in simple terms, is the money your home is making for you. As the property you bought appreciates over the years, it becomes worth much more than what you paid for it.
You can use your home’s appraised value to make the down payment for another property, be it a vacation home, a second home, a rental property or otherwise.
How to Calculate Home Equity (example)
Let’s say your home in Vancouver at a market value of $900,000. When you first purchase your home, let’s assume you had a $100,000 down payment, so your mortgage amount was $800,000. While there may be other costs associated with opening a mortgage (land transfer taxes, GST/HST, mortgage default insurance, etc), we’ll ignore them for simplicity. Your home equity would be calculated as:
$900,000 (home value) – $800,000 (outstanding mortgage) = $100,000 (home equity)
Now let’s jump ahead a decade or so, and assume that you’ve reduced your outstanding mortgage amount by $100,000, to $300,000. Let’s also assume that the market has been good to you and that your home has appreciated in value by $100,000. Your home equity calculation now looks like this:
$1,000,000 (home value) – $300,000 (outstanding mortgage) = $700,000 (home equity)
Because your home equity changes as your home changes in value, your home equity is not strictly a measure of how much you’ve paid off your mortgage. While paying off your mortgage directly increases your home equity, changes to your home’s value means that your home equity will change with the real estate market. Of course, this also means that your home equity can go down over time, even if you continue to pay off your mortgage.
If you’re considering tapping into your home equity for a down payment on a presale condo, there are two main options: a home equity loan and a home equity line of credit (HELOC).
How to Buy a Presale Property Using Your Current Home
Method #1: Using Home Equity Loan to Buy Presale
Home equity loans are a popular way to get cash for a variety of purposes. They are especially attractive for those looking to buy a home or other real estate because they allow you to borrow against the value of your home, not just its mortgage balance.
A home equity loan is a loan where a portion of the borrower’s home equity is used as collateral for the loan. Borrowers often take out these loans to consolidate debt, pay for education or other expenses, or make home improvements.
The interest rate on a home equity loan is usually fixed and determined by the lender based on market conditions at the time of closing.
The interest paid on this type of loan can be deducted from your federal taxes in most cases.
How is the Home Equity Loan Calculated?
A typical home equity loan is based on the amount of equity in your home. The lender will calculate how much they think your home is worth, subtract that value from the current value of your mortgage and then subtract any outstanding loans against the property (such as HELOCs).
The resulting number is what they’ll lend you. It’s important to note that this amount may be less than the price of the condo.
Since it’s a lump-sum equity draw, a home equity loan is a good source of money for major projects and one-time expenses.
When to Consider a Home Equity Loan?
- You want to tap your entire home’s equity at once for major projects or one-time expenses.
- You want to pay off high-interest credit cards and other loans with a fixed interest rate.
- You want to consolidate high-interest credit cards into one low-rate loan.
Home equity loans are a popular way to get cash for a variety of purposes. They are especially attractive for those looking to buy a home or other real estate because they allow you to borrow against the value of your home, not just its mortgage balance.
Home equity loans typically have a fixed interest rate, meaning the payment is the same each month; that makes them easier to factor into your budget. But remember: That home equity loan payment will be in addition to your usual mortgage payment.
Since it’s a lump-sum equity draw, a home equity loan is a good source of money for major projects and one-time expenses.
Method #2: Using Home Equity Line of Credit (HELOC) to Buy Presale
A HELOC is an open line of credit that allows you to borrow against your home’s value without having to pay back every dollar you borrow right away.
Instead, you can borrow money as needed and only pay interest on what you borrow.
You may be required to provide collateral such as a car title or stocks if you want to take out a HELOC on your primary residence
As mentioned previously, it is way easier to use the equity in your initial investment if you have managed to pay the mortgage and hold the property for a number of years.
In general, many people find the idea of borrowing against their home to be daunting. However, home equity lines of credit (HELOC) are actually quite simple and can be an excellent way to borrow money.
With a HELOC, you get a revolving line of credit you can use for whatever you need—and pay back what you don’t use. This makes them perfect for financing a pre-construction condo.
Let’s take the same example of $1,000,000 property from above and let’s say you still owe $800K on your mortgage. In this scenario, you can still borrow $200K (from 1,000,000 – 200K), at roughly 3% or $6K each year and use this money to buy a presale condo for investment and have that money sit in form of a real estate investment
When to Consider a Home Equity Loan?
- You want flexibility in how you use the money — as much cash as you need or just a little bit at a time.
- You expect to move within five years and don’t plan on selling your home in that time frame, since an HELOC repayment obligation lasts only as long as the line is open (typically 10 years).
Difference between HELOC & Home Equity Loan
A HELOC is not the same as a home equity loan. A home equity loan is a type of second mortgage that uses the value of your real property as collateral. A HELOC is an unsecured line of credit that draws on your equity in your home to make purchases or finance projects.
Closing Thoughts
After reading this article you should hopefully have a better idea of how equity loans and home equity lines of credit compare.
Understandably, they both tend to be used for financing the purchase of a new home, but are also used to pay off existing debts in order to free up funds for a new purchase.
We strongly recommend you to get in touch with an expert team that can help you understand both options based on your individual financial needs. Ravi Bhindi of Ipresalecondos has a number of mortgage reps in his team and with his presale experience your decision can never go wrong
