You’ve always wanted to own a small business. No more working for someone else. Owning your own business means you’re working toward something bigger, building something for your family, and taking control of your financial future. It’s exciting, nerve-wracking, and scary. It’s also expensive, especially when you first start.
How do people do it? Where do they get the money? Believe it or not, some people use their homes to start their businesses.
How Home Equity is Being Used
According to information released by the U.S. Census Bureau, home equity has been used as a source of capital for nearly 300,000 businesses, or 7.3 percent of all new businesses, between 2014 and 2017. These businesses aren’t your typical home-based options you might think of. The top new businesses include accommodation, food service, retail, manufacturing, wholesale trade, and educational services.
People borrowed between $50,000 and $99,999 through home equity loans for their new businesses. The data also shows that more women than men used the equity in their home and more minorities have taken this route as well. African Americans, Asian Americans, American Indian, Alaskan Natives, and Pacific Islanders/Hawaiians use home equity loans in greater percentages than other groups.
Why Home Equity Loans?
The reasons for using a home equity loan instead of other forms of financing are as varied as the businesses people start. Although home equity loans took a deep dive during the housing market crash, they are on the rise again. Fewer homeowners are underwater. Values have climbed. People have stayed in their home long enough to rebuild their equity.
There are two types of home equity loans. The standard loan allows homeowners to borrow a lump sum amount. The other option is a home equity line of credit or HELOC. A HELOC allows a homeowner to borrow only what they need as they need it against whatever total amount they’re approved for. HELOCs tend to be popular for business owners because you only pay interest on what you borrow, and you have a period of time before you have to begin paying it back, usually around 10 years.
Getting a Home Equity Loan
To find out if you qualify for a home equity loan and how much you can borrow, you’ll want to speak to a lender. They’ll discuss rates, fees, repayment terms, and the application process. Most lenders want you to have more than 20 percent equity in your home so that after you take out some of the equity, you still have at least 20 percent equity remaining. This may limit the amount you can borrow.
Before applying for a home equity loan, remember the money has to be paid back either over time or upon sale of your home. If you’re planning on moving soon or will use the sale of your home to help buy the next, carefully consider whether now is the right time for a home equity loan.
Being a business owner means you have to think out of the box on a regular basis. Using the equity in your home may not be common but it’s definitely effective. Talk to a lender before you commit so you know exactly what you’re getting into. Understand the terms of the loan and the realities of what it means to increase your mortgage and own a business. These decisions shouldn’t be taken lightly, but they can be rewarding.
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