Refinancing to start a new business
A new business depends on money as its oxygen for growth, and there are two ways that home equity debt could be the source of this vital resource for business. One of them is a home loan that is a one-time payment in lump sum. This payment normally features a fixed rate and is repayable over an agreed period of time over a specific number of payments.
The other option is a home equity line of credit, which could be equated with a credit card. The balance on line of credit tends to change based on repayments, and interest paid tends to be variable depending on the balance on the card.
Accessing your home equity for business investment could also have tax advantages, depending on your business structure. If you are a sole trader, you are effectively investing your personal funds into your business, which may be different from accessing it for a private limited company. As a general rule, you would be able to deduct interest payments on your home equity on your personal tax returns.
Using money from refinancing to grow an existing business
There are distinct advantages to leveraging your home equity to grow your existing business. For instance, if you were to opt for a traditional loan, you may need to guess or make a rough estimate on your business needs, which is always difficult for a growing business with changing circumstances. With home equity line of credit, on the other hand, the freedom to choose your loan amount is all yours – you could draw as much you need, depending on your business plans for expansion and growth.
With home equity line of credit, you can be sure about how much you would end up paying in interest, since you are not charged for the amount that you have not used. This would not be the case with a traditional loan, where you would start paying interest on the entire amount that you owe right from day one!
Further, if you opted for a loan based on a rough estimate, you would find it difficult to opt for another loan if your estimate falls short of your actual requirements. With a home equity debt, you do not have to worry about applying afresh, since you would have the allotted amount earmarked for your needs – you could draw upon it as and when you need the money to invest in your business, giving you ample flexibility.
Refinancing improves your mortgage standing
Ultimately, the home loan scenario is dynamic, with interest rates changing and the economy being in a constant state of flux. Apart from all the benefits that you could draw by leveraging your home equity to power your business dreams, you would also be able to strengthen your mortgage standing by refinancing your home loan.
When you refinance at the right time, you could benefit from lower interest rates – it makes sense to gain from lower interest rates and save dollars, which could well be used to finance your business. Interest rates tend to be lower at different points in time depending on the state of the economy, and it helps to keep a close watch on how things pan out on rates.
Maximising your home equity
It makes sense to maximise the value of the most important asset at your disposal – your home. You could not only secure the future of your business with the right investment at the right time, but could also gain from unmatched flexibility and lower interest rates, enhancing your financial position to make your next business move!