While levels can vary depending on several different factors (including changes in the property value and/or the balance of a mortgage). every homeowner receives equity on their property. When purchasing a new preconstruction unit, equity from a previously-owned property can be very useful when financing the new acquisition. The first step when leveraging your home equity is to calculate the fair market value, or FMV, of a property. Here’s an example:
Let’s say you buy a house for $300,000. You’ve paid off $100,000 of your mortgage, but due to a rise in property values in your neighborhood your house is now worth double what you paid for it. Thus, your FMV is now $600,000. Equity is then calculated by subtracting the remaining amount of the mortgage (in this case $200,000) from the total FMV, so the total equity for this property would be $400,000.
Leveraging that Equity
When buying a new property, lenders will allow you to use part of that equity to fund the purchase of a new home. This process is known as leveraging, and can be used for up to 80% of the home equity amount. For example, of the $400,000 from the property above, $320,000 of it could be used to buy a new condo or house. To use this form of leverage, simply go to your bank and request a Home Equity Line of Credit (HELOC) loan. The HELOC loan, which normally carries an interest rate of #%, can then be used to buy a property for a primary residence or as an investment property. In the case of the latter, the Canada Revenue Agency allows the interest to be deducted on your taxes.
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