Question – Can I Use My Home Equity To Finance A Business?
Our Response – If you own a home and have built up equity, using a home equity loan to finance a business is an option. Now many people don’t want to consider this option because they say – “I don’t want to get a home equity loan for my business because I don’t want to risk losing my house if the business fails.” While this is a legitimate worry, the fact in most cases is that when you go to the bank for a business loan and you have equity in your house, they will put a lien on your property anyway. This isn’t in every case but it happens a lot.
There are two primary flavors of home equity debt which include home equity loans and home equity lines of credit. A home equity loan is a one-time lump sum that is paid off over time, usually 10-15 years and can be fixed or variable interest. A home equity line of credit, also known as a HELOC has a revolving balance like a credit card. The nice thing with a HELOC is that you only pay interest on the outstanding balance, but the interest rate will vary over time. Most lenders will lend up to 80% of the home’s value on the first mortgage and the new home equity loan. Some lenders are willing to go even higher. You don’t have to use your current first mortgage lender for your home equity loan, but is often a good first start since they have all of your information already.
Personally, I would only use a home equity loan to finance a business when:
- The equity in your home is less than the amount you need to borrow for your business.
- You need money for a down payment on your loan and can’t come up with other sources.
- Money is needed to quickly close a deal.
- You need access to additional money for cash flow in the business.
The downside to using a home equity loan to finance a business will be if you need to access some emergency cash. Also I have seen times where clients over estimate what think they need to start their business because they have access to the equity and then borrow too much because it is there. Just because you are approved for a certain amount doesn’t mean you need to spend all of it on overpriced stuff. Last, you are using your home for collateral (and will probably be doing so with a business loan too) so be aware of the risks of going into business and what could happen if your business doesn’t succeed.