For home ownership, lenders will use a home loan calculator to determine your overall loan needs, creditworthiness, and debt-to-income ratio before underwriting, approving, and financing a loan.
Another factor in determining your viability as a borrower is market trends such as the increase in the prime lending rate, which is the rate that the Central Bank sets as the commercial interest rate for any loans they make to other lenders like banks and mortgage companies.
There is a direct correlation between a higher prime rate and the overall interest rate that lenders provide to consumers. The higher the prime rate, the more it costs to borrow from a lender.
And with the increased cost of borrowing, as the prime rate increases, it makes lenders more tentative and selective in lending money to consumers, making it much harder for borrowers to qualify for a loan.
That being said, homeownership provides an opportunity for wealth generation unlike any other.
Owning real estate pays down your debt at the fundamental level while accruing equity. Equity is the difference between the debts on real estate and the property’s value. So, as you pay down your mortgage and the appreciation of the real estate increases, you see a sizable, long-term return.
And the best part is that real estate is one of the only means of producing sizable profits by leveraging someone else’s money.
Here’s how it works.
Say you agree to a mortgage loan at a certain fixed percentage. That loan allows you to purchase real estate at a much higher price than you would otherwise be able to access. As you pay down the debt, your property increases in value which is the equity you’ve earned.
Once the mortgage is paid + the equity gained is the profit you’ve earned.
And, once you’ve purchased real estate, there are various ways to make even more returns on that initial investment by borrowing your home equity.
Ways To Borrow On Your Home Equity
There are two types of debt. There is bad debt, meaning it doesn’t work to make you a return, and there are good debts. A good debt can work for you, like a mortgage, to make a return.
For homeowners, there are other ways to cash out on your home other than selling or renting the property.
The most common ways to borrow on the equity of your real estate are;
- HELOC
- Home Equity Loan
- Refinance
- Asset tokenization
HELOC: HELOC is short-hand for Home Equity Line of Credit. HELOC is a revolving line of credit that allows you to borrow against your home’s equity. It’s flexible, offers few restrictions on the use of the funds, and often can qualify for much lower APR than credit cards.
Home Equity Loan: Home equity loans are similar to HELOC except that a home equity loan is a secondary loan on the home at a fixed rate, and the funds are all in one lump sum.
The advantages of a home equity loan are predictable payments, low borrowing costs, and longer terms for repayment than a HELOC.
Refinance: By refinancing your home after you’ve built up some equity, you’re better situated to pay off your mortgage at lower monthly rates and can even cash out on the equity you’ve built and have money for significant debts, home improvements, or other expenses.
Asset Tokenization: Asset tokenization is a process that allows you to create digital tokens for physical or digital assets that are wholly unique, and ownership is 100%.
So how does this apply to real estate?
Asset tokenization allows you to create tokens for a specified value of a currency, in this case, a dollar for each token. So, for example, you can create tokens for the entire value of your home, allowing you to have the liquidity to your home ownership as collateral.
For example, if your home is valued at $350,000 and you require cash, you can do an asset tokenization of your home’s value for 350,000 tokens.
Depending on the amount you need, you can sell many tokens however as you need. For example, let’s say that you need $25,000. Then, you can sell the appropriate number of tokens to get liquidity on your home without borrowing against the house or selling it altogether.
The advantage of tokenization is that it gives ownership much more flexibility when funds are needed and at much lower rates than a HELOC or home equity loan.
Homeownership provides plenty of ways to make some money, from renting it out to selling outright, but for many, there are additional ways to make money on their real estate, which is a significant way to build long-term wealth.