Taking out a mortgage loan to buy a home can provide a person with more than a place to live. It can be a financial asset to enable an individual to earn extra money. Additionally, it can help a person save money on other expenses. If you’re looking for a way to turn your mortgage from a liability into an asset, consider the following options to see which ones would work best for your situation.
Take out a Home Equity Loan to Remodel Your Home
You can use either a Home Equity Line of Credit or cash-out refinance to remodel the home. Making the right improvements can add value to the house, which will enable you to turn a profit on your investment when you sell the home. However, you have to choose your remodeling jobs with care in order to avoid losing money. Putting in a new roof is the most profitable upgrade a homeowner can make, according to real estate experts. As an added benefit, a new roof can also lower your home insurance rate. New wood flooring also offers a high return on investment, as does a new garage door and upgrading the home’s insulation. The latter upgrade saves you money on monthly utility bills to boot.
If you’re worried about the interest rate on your home equity loan, talk with a tax expert about deducting the interest from your taxes. According to the IRS, homeowners should be able to deduct interest on a home equity loan if the money is used to buy, build or improve your main home or second home.
Use a Home Equity Line of Credit to Invest in a Rental Home
Using a HELOC to buy a rental home is a risky venture. You may be unable to find renters. Alternatively, your renters may damage the home. On the other hand, renting out a second home can be a fantastic source of passive income if you do careful research before making your purchase. Make sure there is demand for rental homes in your area and choose a house that is within your means. You can either rent out the home to long-term tenants or attract short-term tenants from sites such as Airbnb and Vrbo.
Foreclosed properties can offer great opportunities to people looking for affordable second homes to rent out. They cost less than other properties as lenders are eager to sell them off as quickly as possible. As the foreclosure rate is up 14% from the previous year, the odds are you should be able to find properties of this nature in your area.
Consolidate High-Interest Debt
Refinancing a home is out of the question for many homeowners. The FED has raised interest rates at a staggering pace since 2022, and will likely continue to raise them in the second half of this year. Unless your credit score is far higher than it was when you took out a loan, you most likely won’t be able to save money by refinancing. However, you can use your home equity to consolidate other high-interest debts. For instance, the average interest rate on a home equity loan is usually lower than the interest rate on a private student loan. If you use a home equity loan to refinance your student loan, you would pay less per month and save thousands of dollars long-term.
Pay it Off Faster
If you bought your home before the FED started raising rates, don’t rush to pay off your loan. Any extra cash you have on hand would turn a higher profit if invested in stocks, bonds, or mutual funds. However, if your rate is over 6%, you’ll save tens of thousands of dollars by paying extra each month. You won’t see an immediate difference in your payment rate, but the extra payments will shorten the length of your loan and lower the amount of interest you have to pay. You’ll also save money you would have spent on mortgage insurance.
There are two ways you can pay off a mortgage loan before the loan term is up. You can either put aside a bit extra each month to pay down the principal or wait until extra income comes in (i.e., an inheritance, annual bonus, or tax refund) and make a lump sum payment. You just need to make sure there’s no prepayment penalty on your loan before you start adding money to your regular mortgage loan payments.
If you have a mortgage loan that’s weighing on your finances, consider the above options to see if one or more could enable you to make and/or save money. A mortgage loan doesn’t just have to provide you with a place to live. It can also open up opportunities that you can take advantage of to improve your financial standing.
If you or anyone you know has questions about financing or the current housing market, your expert Los Angeles mortgage brokers at Peak Finance are here to help. Contact us today at [email protected].