Sometimes, two major goals converge: You are in the process of paying off your mortgage, but you are also looking for funding for your business. In some cases, one can help with the other, as home equity can be converted into funds for the development of a business.
The first thing to consider is whether using your home equity to finance your business ventures is a sound move for your situation. Early in your home payments, it definitely is not. If you have just put a payment down on your house or you have paid off a small fraction of your mortgage, it is highly risky to get started today and take out a second loan in order to convert your equity into finances for your business. The danger is that by removing your equity, you put yourself at great risk if you run into economic difficulties. Once you are unable to make payments on the second loan, you will lose your home completely.
That said, there are situations in which it is not so unreasonable to convert home equity into funding for a business. In general, it is best to have paid off at least half of your debt on the house before taking out a home equity loan. When you do take out a home equity loan, the lender will offer refinanced home payments, sometimes with interest-only payments. The structure of the loan will affect the amount of income required to afford your monthly payments, so it’s important to consider both how much you will owe and how much your business will produce.
First, you must calculate your expected income and expense totals in order to give yourself an idea of how much money you will have left over to make payments on the home equity loan. Be sure to consider all of the costs that will go into starting your business, including administrative costs and taxes, and subtract those numbers from the total income you expect to collect from your business.
As time passes, you will want to use as much as you can on principle reduction. Many lenders only require interest payments, but for a sizeable loan, it’s important to make significant payments above the minimum interest payments required each month so that you can pay off the loan in full within a reasonable amount of time. Make sure to use reasonable estimates of business performance before taking out a home equity loan so that you don’t risk losing your home.
(Related: Learn about small online business lending that will help you grow your business without having to worry about money)