How to Release Equity to Buy Another House
Before getting into the topic of how to release equity to buy another house, I will first explain what is meant by equity as well as leverage.
Equity and leverage are two very commonly used terms in real estate investing, and they can be considered to mean two opposite things:
The term equity refers to the amount of cash tied to a property. While the money is tied to the property, it isn’t liquefied, and it must be released in order to be used by the investor or property owner.
Leverage, on the other hand, refers to the amount of borrowed money that is tied to a property. The higher the percentage of a mortgage on an investment property, the higher the leverage that you will have on it.
The equity in a real estate property can build up over time in two different ways:
- As you pay down the amount of borrowed money that you have on the property, its equity will increase (and its leverage will decrease).
- If the property increases in value (appreciates), its equity will also increase.
When we say “release equity to buy another house”, what we’re referring to is the ability to untie the cash on the property and use it to buy another property. Simple, right? And the way you do that is by increasing the leverage on a property, which can be done by remortgaging it.
The process of remortgaging a property is very similar to the process of obtaining a first mortgage. The lender will assess your financial situation to make sure that you will be able to pay down the mortgage, and they will consider the property when doing so.
Remortgaging to release equity to buy another house works like this: you own a house that you have a mortgage on. Over the years, you pay down most of the mortgage amount. Now, and if the term for your current mortgage allows it, you can seek a second mortgage from the same lender or from a different one. The new mortgage will be, let’s say, 80% of the property’s value. But since you’ve already paid for the property, and you’ve paid down most of the mortgage that you have on it, the amount that you borrow will be available for you as cash, and you can use it to purchase another property.
While the process of remortgaging to release equity to buy another house might sound like rocket science to some, in reality, it is far simpler than it sounds. Additionally, you can always seek the advice of a financial or a mortgage advisor to get a better understanding of the process, how to do it, and whether or not it is a good idea for you.
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