The term “house rich but cash poor” is commonly used in real estate circles and is particularly prescient when industry experts discuss the Bay Area real estate market. But what does this term really mean?
People who find themselves in this situation have often owned their homes for a while, invested most of their income into their properties, and have built considerable equity over the years. These buyers want or need to leverage that equity to help with the down payment needed for the purchase of their new home.
To access the liquid cash needed for their purchase they believe they have to sell their current home first and have the cash ready before beginning the process of buying their new home. They find that the money needed to buy their new home is locked up in the equity of their current home—thus making them “house rich” but “cash poor.”
The stress of logistics involved in finding a place to live between the sale of a current home and the purchase of a new home can feel overwhelming —especially in a competitive market with low inventory. Homeowners feel like they have to make the hard choice between getting a short-term lease, (usually at a premium monthly rate), moving in with family or friends, finding an extended-stay hotel or staying at an Airbnb. Or they have to require a rent-back agreement when selling their current home, at the risk of deterring potential buyers.
None of these options are ideal, and we have had many clients who have come to us feeling trapped in similar predicaments.
The good news is: We have helped them and can help you find alternate solutions. We are here to tell you that in the fast-moving world of the 2024 Silicon Valley real estate market, there are opportunities for homeowners to leverage the equity in their homes to achieve their financial goals. No matter where you are interested in purchasing a home in Silicon Valley, equity-based lending is an option to consider.
When it comes to major purchases, equity-based lending offers a pathway to unlock the value of your real estate assets to help you access the liquidity you need to purchase your dream home. In this comprehensive guide, we delve into equity-based lending, exploring its various facets and how it can empower homeowners to make strategic financial decisions.
Understanding Equity-Based Lending
At its core, equity-based lending revolves around tapping into the equity accumulated in a property as collateral for a loan. Unlike traditional mortgages that focus on the initial purchase of a property, equity-based loans allow homeowners to access the wealth they've built over time through mortgage payments and property appreciation.
In the most simple terms, equity-based lending allows people to buy before they sell.
In this blog, we will focus on one of the most common equity-based lending options, a home equity loan.
What is a Home Equity Loan?
Also known as a "closed-end" or "second mortgage," a home equity loan provides homeowners with a lump sum of money based on the equity in their property. The loan is typically repaid over a fixed term with a fixed interest rate, making it an ideal option for financing one-time expenses such as a new home purchase.
For a buyer who finds themselves in this position, this may be the perfect opportunity to leverage their current home’s equity to buy a new home. They can then sell their current home without the fear of trying to find in-between housing and with the comfort and security of having settled into their new home.
Benefits of Equity-Based Lending
- Access to Capital: Equity-based loans provide homeowners with ready access to capital without the need to sell their property. This liquidity can be instrumental in funding major life events like buying a new home, offering a valuable financial resource when needed.
- Tax Advantages: One of the primary tax advantages of a home equity loan is the ability to deduct the interest paid on the loan in certain situations. Consultation with a tax advisor is recommended to understand the specific implications based on individual circumstances.
- Flexibility: Equity-based lending options offer flexibility in terms of loan terms, repayment schedules, and utilization of funds. Homeowners can tailor their borrowing strategy to align with their financial objectives.
While equity-based lending presents numerous benefits, homeowners need to approach these options thoughtfully and responsibly. Consider the following factors when evaluating equity-based lending:
Considerations for Equity-Based Lending
- Loan Terms and Interest Rates: Review the terms of the loan carefully, including interest rates, repayment schedules, and any associated fees. Compare multiple lenders to secure favorable terms that align with your financial goals and budget.
- Risk Management: Assess your ability to repay the loan and manage the associated financial obligations. Be mindful of potential risks, such as fluctuations in interest rates or changes in financial circumstances, and have contingency plans in place.
- Property Valuation: Obtain a current appraisal of your property to determine its market value and ascertain the amount of equity available for borrowing. Accurate property valuation is crucial for making informed decisions and maximizing the benefits of equity-based lending.
Equity-based lending options offer homeowners a powerful tool to unlock the value of their real estate assets and pursue their financial aspirations. By understanding the functionality of equity-based loans, weighing their pros and cons, and engaging in prudent financial planning, homeowners can harness the value of their current real estate and pursue the purchase of a new property.
At the Veeravalli Team, we specialize in helping homeowners navigate the complexities of the Silicon Valley real estate market. We work with some of the best lenders in Silicon Valley who continuously help our clients find creative financing strategies that help get them the homes they want. Whether you are interested in homes for sale in San Jose neighborhoods like Cambrian, Blossom Valley, or Almaden Valley, or more interested in Saratoga, Campbell, Los Gatos real estate, and beyond — we have someone who can work with you.
Contact us today to learn more about how we can assist you in not only exploring equity-based lending options, but any and all of your real estate needs.
We want to be your real estate resources for life!
Are you looking for top Silicon Valley REALTORS® at The Agency? Follow the Veeravalli Team for an exclusive look at Blossom Valley, Los Gatos, Cambrian, Campbell, San Jose real estate and more.
Ashwin Veeravalli
(408) 784-6595
LIC.# 01914395
Aparna Veeravalli
(408) 887-0330
LIC.# 01952626
The Agency Los Gatos
Disclaimer: This blog post is for informational purposes only and should not be construed as financial advice. Individuals should consult with qualified professionals for personalized guidance regarding equity-based lending and financial planning.
