If you’re looking to secure a rental property in Florida, then you might be interested in taking out a home equity loan. Taking out a home equity loan on investment property in Florida lets you leverage the value of your property based on mortgage payments. A home equity loan is a cost-effective way to obtain a low-rate loan, and in this article, we’ll go over all of the fine details of this financial product.
- Home equity loans are a viable way to secure rental property in Florida if you already own property.
- This type of loan allows you to leverage your property’s value to secure a low-rate loan.
- There are other options too, such as hard money loans or mortgage refinancing.
Home Equity Loan (HELOC) On Investment Property In Florida
A home equity loan is a useful financial tool that gives you the power to benefit from the value of your existing property. A home equity loan works by allowing you to borrow against the value of your property, less the remaining mortgage amount owed. In Florida, you’re eligible to borrow up to 80 % of your property value.
When it comes to obtaining a home equity loan on a rental property in Florida, there are many benefits you can reap. You can use a home equity loan with your rental property and then use the capital to perform maintenance on your existing property, or invest it into other properties. You can even use it for debt consolidation – giving you plenty of scope to make the most out of this financial product.
Home Equity Loan On Investment And Rental Property
If you’re considering taking out a home equity loan on rental property in Florida, you’ll want to make yourself aware of the surrounding rules and legislation. Learning about the laws around this type of lending will help you navigate things effectively and get the most out of your investment. So, let’s take a look at the laws around home equities loans for investment and rental properties in Florida:
In Florida, home equity loans are classified as secondary mortgages and fit into the same regulatory framework as traditional, primary mortgages. As such, any lender in Florida will require full licensing and must adhere to both state and federal laws around lending.
Consumer Protection Regulations
Home equity loans in Florida are also covered by the Truth in Lending Act (TILA) which means all lenders have to disclose the terms and conditions of loans. This includes interest rates, associated fees, and the final cost of the loan. The Real Estate Settlement Procedures Act (RESPA) is also in effect and ensures that all real estate transactions are completely transparent.
Equity Loan Limitations
There are also certain limitations you’ll want to be aware of that impact equity loans in Florida. You can’t exceed 80 % of your property’s equity and you can only have one equity loan out at a time. What’s more, you can only take out one equity loan every year – even if you have paid off your previous loan.
What Are The Specifics Of Home Equity Loans In Florida?
Home equity loans in Florida are governed by a blend of state and federal legislation. The specifics of these loans include the interest rates you’ll pay, the potential tax implications, and a few other legal considerations. So, let’s go over these areas below:
Lenders in Florida tend to offer a competitive interest rate for their home equity loans. However, what they can offer depends on your own individual merits, such as your credit history and the amount of loan you’re asking for. Typically, home equity loans have fixed interest rates that won’t change during the term of the loan.
Loan to Value (LTV) Ratio
The LTV ratio is a type of lending risk assessment ratio that lenders use to decide whether or not to offer a home equity loan. This ratio denotes the percentage of the property value that the lender can offer you. Typically, the LTV ratio for home equity loans is 80 %, but some lenders might only offer 70 % for rental properties.
Repayment terms for home equity loans vary but typically range from 5 to 30 years. This flexibility allows you to undertake this loan without harming your finances. Most people pay in fixed monthly installments that bring together the principal and interest of the loan.
Cash Out Loans On Investment Property
A cash-out loan on an investment property is a type of mortgage refinancing that allows you to take out a new loan that is larger than your existing mortgage. You’ll receive the difference as a cash payment and it is designed with investment properties in mind. It works by replacing your existing mortgage with a new one, with new terms. You can then use these funds to renovate, repair or buy new property.
Borrowing Limits And Calculating Home Equity
The amount that you can borrow using a home equity loan in Florida will largely depend on the value of the property you own and its accumulated equity. As mentioned, you can typically borrow anywhere up to 80 % of the equity you have in your property. However, you’ll need to first calculate your equity amount, so let’s go over this below:
- Market Value: The first thing you’ll need to do is find out the market value of your property. You can do this by having a professional appraisal conducted or simply by looking at local sales prices for similar properties.
- Deduct Mortgage Balance: Next, you’ll have to deduct the remaining balance of your mortgage, as well as any other property liens, from the market value of your property.
- Calculate Equity: The final number you come to will be your equity. So, if your property has a value of $300,000 and you still owe $200,000, then your equity will be $100,000.
Florida Cash Out On A Second Home
Although you can take out a cash-out loan for a second property in Florida, it doesn’t come without risks. If your second property doesn’t generate sufficient income over time, then lenders may view you as a high-risk prospect which could cause interest rates to rise. There are a few different things that will impact this process, such as:
- The total amount of equity for your second property.
- How much income you bring in, as well as any outstanding debts or arrears.
- The level of income being generated by the second property.
Due to the complexities involved in using a cash-out loan for a rental property in Florida, it’s worth speaking to a specialist mortgage advisor. They can help you navigate these complexities and find terms that are more favorable to your situation.
Home Equity Loans And Capital Gains In Florida
Any funds received from a home equity loan on your investment property in Florida can’t be taxed. This is because the funds you receive are a loan rather than a payment. Also, the interest that you pay on your rental property home equity loan can be tax deductible, giving you a chance to lower your tax bill. However, this doesn’t apply to capital gains tax.
Capital gains tax works by assessing the difference between the purchase price of your property and its selling price, minus any improvements you’ve made. Although primary residences are exempt, investment properties are still subject to capital gains tax.
What Are The Pros And Cons Of Home Equity Loans On Investment Properties?
Deciding on taking out a home equity loan on an investment property takes some serious consideration. There are certain advantages and disadvantages to this financial product that you’ll want to be aware of. So, to help inform your decision-making, let’s learn about the pros and cons of home equity loans on investment properties:
- Unlocking Capital: One of the most notable benefits is that you’ll receive a lump sum cash payment that you can use however you’d like.
- Low Interest Rates: When compared to other financial products like credit cards, home equity loans offer favorable interest rates as they are secured by your property.
- Tax Benefits: You can use the interest you pay on your home equity loan as a deductible, lowering your tax liability.
- Foreclosure: If you don’t make payments on your loan, it’s your property that is on the line as it could be foreclosed.
- Equity Drop: When you take out a home equity loan, your existing equity in the property drops. This could be bad news if the property value drops, too.
- Debt Obligation: A home equity loan is another debt that you’ll be obliged to cover, which could be a problem if you don’t have sufficient capital.
Comparisons Of Home Equity Loans And Other Financing Options
It’s worth comparing home equity loans with other financing options as it will give you the best idea about which option is right for you. Mortgage refinancing and a hard money loan can also work, but they each have their own drawbacks. So, let’s take a closer look at your options below:
Mortgage refinancing is a way to replace your current mortgage with a new one that features new terms and rates. You can use your existing equity as a downpayment for this mortgage. Doing so will allow you to borrow more than you owe and you get to keep the remaining funds to use however you like. Refinancing does have drawbacks to consider though, such as its impact on your equity. These loans, especially when larger than your original one, tend to come with higher interest rates attached.
Private Lenders And Hard Money Loans
Hard money loans are offered by private lenders and are often used by real estate investors. Interest rates for these loans are quite high, often higher than home equity loans and refinancing due to the higher risk. These types of loans tend to focus more on the value of the property and its potential for investment returns, rather than your credit history.