Taking equity out of the increased value of the home is generally considered bad especially with the current mortgage crisis. However if you are smart about the way you handle the money from your home equity, it can help you make a lot of money. A great article about leveraging your Home Equity can be found at http://www.shearealty.com/TX/pdf/Optimal_Wealth.pdf
I recently took advantage of the equity in my home to make a real estate investment in India. It is a new residential construction in my hometown Mumbai. My plan is as follows,
- Take a Home equity loan at around 8% for a period of 15 years.
- Home Equity loans are tax deductible so the effective interest rate is around 6%.
- Hopefully I get at least a return of 10% from my investment property. With the real estate craziness going on in India, I do expect a better return.
- Presently the dollar is about 39.5 INR. It used to be at 50 INR before 4 years. With India’s economy getting stronger and the US trade deficit, I expect that USD will continue on its long term decline.
- I hope to profit on 2 points,
- 10% profit compared to the 6% interest on the loan.
- A weaker dollar long term will add to my profit margin.
It is worthwhile to mention at the same time that I don’t think its a smart idea to use your Home Equity to get a brand new Mercedes or a Hawaii trip or a gambling spree in Vegas(although I would love to do that ;))
Related Blog articles
James has a good article on when to borrow against your Home at http://www.dinksfinance.com/2008/05/when-to-borrow-against-your-home.htmlÂ
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