If you’re still paying a mortgage, starting another costly venture, such as a business, is probably the last thing in your mind. However, profiting from a business is an excellent way to grow your budget and pay off your mortgage more manageable.
You can use your home equity to finance your business idea. But if you’re unfamiliar with equity, making a decision regarding it can be tricky. Hence, we’ll explain how home equity is earned and what you can do to decrease the burden of your mortgage.
What is Equity?
Equity is the percentage of your home that you fully own. Its exact amount is determined by how much of your mortgage is already repaid. As you continue paying off your mortgage, the higher your equity goes, while the lender’s interest in your home declines.
You can also build up your equity by living in an area where property values steadily appreciate. That increases the value of your home, which becomes beneficial when you sell it.
If you have a fixed-rate mortgage, and interest rates begin falling, it may be a good idea to get a mortgage refinancing. You can convert from a fixed-rate mortgage to an adjustable-rate one, which usually has a lower interest rate than a fixed term. It would be more favorable if you don’t plan to live in your home for more than a few years because aside from having your interest payments reduced, you’d also be spared from worrying about interest rates going higher in the far future.
The rule of thumb is, it is a good idea to refinance your mortgage if you can decrease your interests by at least 12%. But many lenders say that a 1% decrease is already a good enough reason to refinance.
Refinancing is also a way to tap into your home’s equity. Homeowners usually pull their equity to finance major expenses, such as a home remodeling or their children’s college tuition. You may also use it to fund your business idea.
To understand how to use your equity further, let’s look into cash-out refinancing. In this type of loan, you can borrow more than what you owe and obtain the difference in cash, which you can use as capital.
The amount higher than what you owe is determined by how much equity you already have in your home. In typical cases, borrowers can loan up to 80% to 90% of their home’s value.
How to Use Equity in Business
A vital tip to remember when using your equity as capital is that your home is the collateral. Hence, you have to make your business profit as quickly as possible. Otherwise, you can lose both your business and your home.
Try cross-selling or offering additional products or services that complement your existing ones. For example, if you’re running a massage parlor, you may also sell massage oils and aromatherapy. Or, offer those as giveaways for returning customers.
Pump up your marketing game, too. Use social media, post engaging content, and design your website attractively. You can also try affiliate marketing tools to entice new customers to your sites.
Expand your network by leveraging social media, participating in webinars, conducting demos, and more. The goal is to make yourself known fast. However, this can rack up your expenses, so determine which marketing strategy drives sales the best, and direct your investments on those.
Lastly, make all of your employees, friends, and family your salesperson. Have them share your business’s posts on social media to spread brand awareness. Encourage your employees to promote your business by conducting fun seminars and sit-down meetings.
Making your business flourish fast — without taking shortcuts — is the best way to put your home equity into good use, and to repay your loans without going through the eye of a needle.