Buying a Rental? How to Use Your Home for Capital

Do you want to purchase an investment property? More and more Americans have gotten into the landlord business, and realize the potential for lifetime income that comes with both short-term and long-term rental units. And if you're already a homeowner, you may be able to use your existing home to invest in that new property. Here's what you need to know about doing using your home for capital.

How to Use a Refinance

Refinancing your primary home is a great way to unlock its value for use in other ways. Look for a cash-out refinance loan that allows you to borrow up to 85 or even 95 percent of the equity in your main piece of real estate. The borrower pays off their first mortgage as needed and then can generally use the excess cash for anything they want or need, including a rental home. 

For homeowners who have been in their home for a while and paid down their initial mortgage, this can add up to a lot of cash available to put down on a rental. Similarly, if the value of your home has increased due to market conditions, you may also be able to tap into significant amounts of that value.

Cash-out refinancing loans are available from most mortgage companies and offer a wide variety of choices in term length, interest rates, and fees and conditions. A borrower with a good credit score and plenty of equity can often find that their new deal — even with the cash taken out — is equal to or better than their old loan. 

How to Use a Second Mortgage

Don't want to refinance your entire mortgage? If you got a great deal on your original loan or have only a few payments left, you may not want to refinance the entire mortgage. In this case, a second mortgage could be what you need.

Second mortgages are subsidiary to first mortgages, meaning they offer credit based on the difference between what the collateral (the property) is worth and what you owe your first mortgage. 

Second mortgages often allow you to borrow up to 85 percent of your home's value (minus the amount of the primary mortgage remaining), so the potential is high. The lower your initial mortgage or the greater the difference between it and your home's current value, the more you can get from a second mortgage. 

What Else You Might Need

If you plan to use your home's value as the primary source of capital for your investment property, you'll need to ensure that you have sufficient equity to do so. However, depending on how much your target properties cost, you may also need more cash on hand to make up the difference. Many homeowners just starting out with this method opt for lower-cost or fixer-upper properties until they get established. 

In addition, both refinancing and applying for a second mortgage have many of the same requirements as traditional first mortgages. This includes a good credit score. The minimum credit score for most second mortgages, for instance, is 620. But because interest rates may not be as good as a first mortgage, your goal should be a higher credit score so you can qualify for the lowest rates possible. 

Where You Can Start

What's the best way to start learning about options for using your current home as a source of capital for an investment property? Speak with the mortgage and refinancing professionals at Secure One Capital today. We will assess your real estate situation, your goals, and your options to help you find the right path toward becoming a landlord. Call or visit our website today to get started.