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Can Home Equity Be Used As A Business Loan

Dec 23, 2007
Though many business owners at some point might tap into their home for equity as a financing source, you need to determine whether if this strategy is right for you.

As long as your home has appreciated in value, there will be a bank or mortgage broker who wants to loan you money right up to your credit limit. It's in their best interest because they make more money that way.

First, you should know the basic difference between the two primary kinds of home equity debt. A home equity loan is a sum that is paid off over a particular amount of time with a fixed rate and number of payments.

A home equity line of credit works more like a credit card because it has a revolving balance. Interest is due on the outstanding balance and that rate may vary over time.

Many business buyers often use equity from their homes as collateral for a business purchases. Home equity lines of credit are popular. They can be prepaid, cost less up front, and you can take longer to pay them back.

If your personal debt is an issue, but you have a good credit score, you can get a commercial loan and use your credit and the value of the property to quality. All outstanding debt will be considered when applying for any loan.

The lender will look at your finances to see if you can afford to take on additional debt. In the case of a home equity loan, they will look at the total amount available, not the current amount owed.

Let's look at the risks because quite a few things need to go your way for you to use your home equity line effectively. You need stable interest rates and rising home values, which work best during a strong economy.

You also need to check out the following for clarification: Will your investment deliver a greater after-tax return than you'll be paying for the loan?

How much is property appreciating each year in your neighborhood on the average? Is it enough to further offset the cost of your investment?

From a cash flow perspective, will you be able to service the debt, make the loan payments, assuming your investment doesn't work out?

How much other debt do you have? Do you have significant balances on credit card or auto debt? They may raise the rate you pay on your loan, another potential cut in your investment profit potential.

Home equity is a good option for many important financial goals, but you have to balance risk against potential reward.
About the Author
Court provides information about internet marketing through his website: Court's Internet Marketing School.
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