Equity Lines on Homes

Since prices in the area rose so much over the past year, we are seeing a lot of people take out home equity lines (which is different than refinancing) to spend their new-found equity on renvoation projects, paying off car loans, taking the family to Disneyland, you name it.

The banks will allow you to refinance or equity lineanything over 20% of the appraised value of your home. In other words, if your home appraises at $500,000 and you owe $350,000, then $100,000 equity has to remain untouched and you can "play" with up to $50,000. I'm simplifying things a bit, but that's how it works.
There are 2 ways to use equity in your home: one is to diversify and leverage, and the other is on a cosumer basis. The smart one, however, is diversity and leverage.
Here are two examples:
1. Renovation Projects
More often than not, these are a wise use of equity - you can improve your principle residence, essentially using the home's value to increase it's own value. Brilliant. An added bonus is that the equity used isn't taxable because whenever you do decide to sell your principle residence, in most cases you're exempt from capital gains. You would also pay income tax on the money used to renovate the home, if that money was coming from your paycheque - not so with an equity line.
2. Purchasing Another Property
An equity line applied against one property in order to purchase another rental property can be an excellent move to increase your wealth. Say, perhaps, in addition to some savings, you use an equity line to put the 20% down-payment needed on your first (or next) revenue property. Long term, it can be a fantastic idea that'll pay enormous dividends. An added advantage is that, if you prefer, most equity lines can be mitigated with interest-only payments. So, if you have rental places that have capitalization rates 6% or 7% AND they're increasing in value, drastically out-performing your borrowing.
Have any questions? Give us a call! We'd love to chat with you about your options.
No comments

Post Your Comment:

The data relating to real estate on this website comes in part from the MLS® Reciprocity program of either the Real Estate Board of Greater Vancouver (REBGV), the Fraser Valley Real Estate Board (FVREB) or the Chilliwack and District Real Estate Board (CADREB). Real estate listings held by participating real estate firms are marked with the MLS® logo and detailed information about the listing includes the name of the listing agent. This representation is based in whole or part on data generated by either the REBGV, the FVREB or the CADREB which assumes no responsibility for its accuracy. The materials contained on this page may not be reproduced without the express written consent of either the REBGV, the FVREB or the CADREB.