Realty Executives International
What Homeowners need to Know about Real Estate and Debt
Investments can help you earn lots of money. If you can invest your money judiciously, you can get a good return. There are various kinds of investment vehicles through which you can earn extra dollars. Real estate finances and investment is a good and profitable investment vehicle. If you can profit from your investment, you can use that money to pay off debt.
Why is real estate investment profitable?
There are various reasons why real estate investment is considered to be quite a good investment vehicle:
- Property appreciation – Properties generally appreciate during inflation. So, if you now invest in real estate, you may be able to sell it later at an appreciated value, thereby earning money. Later you can use this money to pay off debt.
- Supply and demand – The American population is increasing. Thus, as per the rules of supply and demand, the constant need for housing will also increase. However, the demand for housing may not be the same every year.
- Correct pricing mechanism – The real estate market is not governed by the parameters that generally control the other types of investment, such as stocks or Forex. The pricing mechanism depends on the decision of the buyer and the seller. Therefore, an investor having excellent negotiation skills may be able to make more profits in real estate investment.
- Rent-friendly inflation – Property rents generally increase with inflation. So, if you invest in rental property, you may get higher rents even if your mortgage payments remain the same in case you had taken out a Fixed Rate Mortgage or FRM against your property. Inflation increases the demand for properties, increasing the rent on properties.
- Equity build-up – You can also get money from your property if you make regular mortgage payments on time. If you make regular payments, the loan amount decreases, and your property’s equity accumulates. You can use this money to pay off debt and use it for other purposes like home improvements.
You can finance your property by taking out a mortgage loan. However, this is not possible in other investments like stocks or bonds.
Know about real estate equity and real estate debt risk.
Real estate investment is undoubtedly an excellent option for investing money as you can make a massive profit, but it involves certain risks. Over a certain period, you can either build equity in your house or take on too much debt and lose significant money.
Equity is the residual claim or interest of the investors in assets after all liabilities are paid. It is the difference between how much you owe on loan and how much your house is worth. You will be left with negative equity if the penalty exceeds the asset.
Real estate investment needs a considerable amount of money which people often cannot afford to pay. So, what real estate investors do is they use debt to purchase real estate. Debt here is referred to as a mortgage or loan. People can obtain this loan by making a down payment on the property. However, the drawback of using debt to purchase a house is that you must repay the debt before realizing any profit.
Equity and debt have specific benefits to investors. If you have equity in a house, you can use it for many reasons. If you sell the property, you will get immediate access to the equity in your property. You can also access the equity without selling your house if you take out a home equity loan on the property. The benefit of using debt in real estate investment is that you can leverage your available capital while enjoying all the profits from the investment.
Real estate investment has its own risk. If the property’s value declines after investing a large amount of money and borrowing a hefty amount from the lender, you will be in an upside-down position. You will owe more money on a house than it is worth.
Before investing in real estate, consider each investment to determine if it is good. Try to buy a cheap property as it involves less risk. Real estate investment is only for some, but many investors have been successful with this type of investment.
How would real estate help to pay off debt?
If you are suffering under the burden of debt, being constantly harassed by creditor calls, then it is time to consider all options for paying off debt. Cash-out refinancing can be the best way to finance your debt repayment process if you own a home. Cash-out refinancing is a process by which you can refinance your mortgage to have some extra cash to use.
In cash-out mortgage refinancing, you apply for a new mortgage more significant than the current mortgage plus the costs incurred due to loan settlement. The idea of cash-out refinancing is to extract equity that you have built on your home.
Why should you opt for a cash-out refinance?
There are various advantages of cash-out refinance. These are listed below.
A large amount of cash – Cash-out refinance can provide you with a lump sum amount of money which you can use to pay off debt or other financial purposes.
Easier to obtain – Cash-out refinancing is easy to qualify as you already own the home against which you are taking money. In most cases, you owe less than the actual worth of the house.
Entitled to tax benefits – Cash-out refinancing can entail significant tax benefits if you use the loan to pay off your other debts on which interest is not tax deductible.
Lower interest rate – Most of the time, when you are refinancing, you tend to opt for a more significant loan amount on which you can get a lower interest rate. Thus, you get cash in hand and pay lower interest payments on your mortgage.
Can you consolidate debt with the help of a cash-out refinance?
Debt consolidation is a method to pay off your debts that is more accessible and faster. In this method, you take out a loan at a lower interest rate to repay your debts. Then you can pay back this single loan with time. You can consolidate your debts into single monthly payments.
You can use the cash from a cash-out refinance to consolidate your debts. Since the interest rate on cash-out refinances is lower than other unsecured loans, you save a lot of money in the long-run on interest payments.
Homeowners should clearly understand their real estate and debt situation to make informed decisions to help them achieve their financial goals. They should be aware of their monthly mortgage payments, interest rates, and the impact of additional debt (credit card balances or personal loans) on their overall financial health.
Homeowners should also regularly review their home value and equity to ensure they are on track with their long-term financial plans. It is crucial to seek professional advice from financial advisors, real estate agents, or mortgage lenders to understand the complexities of real estate and debt management. By staying informed and making proactive decisions, homeowners can protect their financial well-being and achieve long-term financial stability.
About the Author: Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for the Oak View Law Group in California as a principal attorney.