In the third quarter of 2021, more than a third of homeowners were still rich in equity. According to ATTOM’s U.S. Home Equity & Underwater Report for the period, 39.5 percent of residential properties mortgaged in the U.S. have estimated loan balances that are half or less than their estimated market value.
According to Bankrate, homeowners can tap this equity to fund a business through a home equity loan with a fixed interest rate or a revolving home equity line of credit (HELOC) with variable interest rates. As of December 4, a home equity loan can have an interest rate as low as three percent.
Both loans use the home as collateral and incur payments on top of the monthly mortgage. In a home equity loan, the homeowner gets the entire loan amount immediately and starts paying the fixed sum monthly. In a HELOC, the homeowner can borrow only part of the approved loan at a time and only pay installments for the amount used.
To qualify for either loan, a homeowner must have no less than 20 percent home equity. The total loan ratio of the remaining mortgage balance and any current home equity loans must not exceed 80 percent of the home’s market value.
The homeowner must have enough income for all payables. All monthly debts must not exceed 43 percent of the gross monthly income. The borrower must also have a credit score of at least 650 and a good credit payment history.
Becoming a Landlord
One of the most reliable businesses is a residential rental if tenants are strictly screened to ensure that they will be able to pay the rent regularly and on time. A homeowner can use a home equity loan to build a smaller house with a separate entrance beside the current one. The homeowner can then move to the new structure and rent out the older but bigger one. This can bring in higher rent because single-family home rentals are in demand. Data shows that rent from single-family homes rose by 10.2 percent in September 2021 compared to September 2020. This was the fastest annual increase in a span of 16 years. The forecast is for rents to continue to increase.
The monthly rent from the older house must be higher than the monthly home equity loan payment. The difference will be extra income for the homeowner while retaining the old house and having a new house, as well. The entire property will grow even higher in value because it contains two houses.
To rent out the older house, the homeowner must ensure that everything is in good working order. For instance, if the insulation is damaged, the homeowner must have it removed and hire a spray foam insulation service. The electricals, plumbing, and heating, ventilation, and air conditioning (HVAC) system must also be in good condition.
Building the Smaller House
The new house can be an accessory dwelling unit (ADU) attached to the current house or detached from it. Its size will depend on the available land area. Even if the land area is small, the structure can have two floors and even a rooftop patio. If there is not enough available land, one option is to build the ADU over the garage.
Moving to a smaller home is ideal for people who are now empty-nesters, with grown children living on their own. The tiny house movement is attracting many people because it aligns with the minimalist movement. Streamlining one’s possessions and getting rid of excess and clutter simplifies life. Having just enough space for one’s needs makes it easier to keep everything clean and tidy.
An ADU can be prefabricated. There are many companies selling various types and styles of high-quality prefab homes. Some can be customized according to the available space, needs, and taste of the homeowner. These are made in a factory and put together on-site. Work is, therefore, much faster. There are also prefab homes that are built with energy-efficient features such as solar panels. There are ADUs available for as low as $26,000 to less than $100,000.
Checking Applicable Laws and Regulations
Before embarking on the project, however, it is important to first check on all applicable state and local laws and regulations. For instance, Oregon and California have been welcoming the construction of ADUs these past years as a response to their acute housing shortage. Illinois prohibits local governments from banning ADUs. In these states, however, there are differences in local regulations among counties and cities. Other states may have other views regarding ADUs, as well. Homeowners who are in ADU-friendly locations are fortunate. This opportunity must, therefore, be grabbed.