Most people tend to think of a mortgage loan as a necessary evil, an expense that has to be managed.
But under the right circumstances, your mortgage can become a smart investment – something that makes you money instead of costing you money.
With a little bit of ingenuity and a lot of hard work, you can turn your mortgage into a money-making investment that will pay dividends for years to come.
When delving into the world of real estate and investment property, there are many terms that will come up that require further explanation.
Whether you’ve never heard the phrase ‘home equity’ before or you have a little familiarity, here are the ins and out of what it means and how this asset can help your financial outlook.
So how do you turn your mortgage loan into a productive investment? Here’s what you need to know.
All About Home Equity
Essentially, home equity refers to your portion of the value of your home, and the amount of this figure is important because it is included among your assets when determining your net worth.
If this sounds confusing, think of it this way: if you have completely paid off the mortgage on your home, the value of your home equity is it’s current market value.
Of course, because most people seek a lender to borrow money from when they purchase a home, their home equity would consist of the difference between their home’s value and their home’s remaining mortgage amount.
An Example Of Home Equity
To provide further clarification, let’s use the example of a house that has been purchased for $300,000.
In the case that a down payment of 20% has been provided at the time of purchase, the equity in the home would be $60,000.
Over time, the amount of equity could (and should) increase if home values are appreciating and you are paying down your mortgage with each monthly payment
How Home Equity Works
As you pay the amount that you owe on your home each month, you are paying off your total debt and thereby increasing your equity.
Since this amount of money is considered an asset that belongs to you, it can be used down the road to buy another home or invest in other important things like education or retirement.
While paying off the amount owed on a home is a considerable investment, if the value of your home increases, this means that you’ll still owe the same on it but your home equity will have automatically increased.
A Mortgage Can Help You Buy A New Rental Property
One of the simplest ways that a mortgage can become an investment that adds value to your portfolio is by using it to buy an income property.
For a first-time investor, the simplest arrangement is to buy a single-family home and rent it out.
And if you live in a college town, you’ll find no shortage of students looking for housing – meaning you’ll never have a hard time finding renters.
In order to make this work, you’ll need to first have enough money saved up for a down payment. Talk to one of our prefered mortgage lenders to find out how much money you need to save. In most cases, you can get a home with as little as 3% down.
You’ll also need to have your rental rates high enough to turn a profit, but not so high that you have difficulty finding renters.
And finally, if you want to really maximize your return, you’ll want to consider turning the home’s basement into a secondary suite. While this is not necessary, it will allow you to max out your rental income.
A Mortgage Can Give You A Home To Flip
The second major way that a mortgage can be a productive investment is by using it to flip a home.
House flipping has become very popular in recent years thanks to a number of television programs like Flip This House – and although flipping a home can result in a major windfall, it’s not easy.
In order to make a house flip work for you, you’ll need to carefully plan out the flip and ensure that you buy the right property at the right time.
Beginning flippers should usually start with something small, like, an older bungalow.
For a first-time investor, the simplest arrangement is to buy a single-family home and rent it out.
And if you live in a college town, you’ll find no shortage of students looking for housing – meaning you’ll never have a hard time finding renters.
In order to make this work, you’ll need to first have enough money saved up for a down payment. Talk to one of our prefered mortgage lenders to find out how much money you need to save. In most cases, you can get a home with as little as 3% down.
You’ll also need to have your rental rates high enough to turn a profit, but not so high that you have difficulty finding renters.
And finally, if you want to really maximize your return, you’ll want to consider turning the home’s basement into a secondary suite. While this is not necessary, it will allow you to max out your rental income.
A Mortgage Can Give You A Home To Flip
The second major way that a mortgage can be a productive investment is by using it to flip a home.
House flipping has become very popular in recent years thanks to a number of television programs like Flip This House – and although flipping a home can result in a major windfall, it’s not easy.
In order to make a house flip work for you, you’ll need to carefully plan out the flip and ensure that you buy the right property at the right time.
Beginning flippers should usually start with something small, and seek help from professional contractors.
Pat Kalamatas 312.217.4398 or patrick@103realty.com