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Starting Your New Business With Home Equity Staff - Mortgage Lenders Plus.com

If you’ve got Entrepreneur’s Disease and have decided to go into business for yourself, it’s worth considering funding that business with the equity you’ve built up in your home. There are several ways to go about it, depending on what sort of business venture you have in mind, but current home equity loan rates make the concept interesting.

The first question is whether to refinance your mortgage or take out a second loan; or choose the alternative of an equity line of credit. The line of credit with leave you with a variable home equity loan rate, but that may be perfectly acceptable if you expect your new venture to generate sufficient cash flow that you can return your initial business capital to the credit line in relatively short order.

If you expect that money to be tied up for a while, a fixed rate second mortgage at current home equity loan rates probably makes sense. You’ll have the loan origination costs to deal with, but the fact is that almost three quarters of home equity loan withdrawals now come in the form of cash-outs.

Compared with the spiraling costs of home equity credit lines, fixed-rate cash-out refinancing into 30-year or 15-year mortgages now looks smart. Some variable home equity loan rates tied to credit lines started below four percent two years ago. Today, a typical "prime-plus-one" (prime bank rate plus 1 percent) credit line is going to start at over nine percent.

Whichever option you choose, the interest that you pay on the money you borrow will be tax deductible. In the case of a business loan, both the principal and the interest are deductible. Can you deduct interest on a current home equity loan rate and then loan your cash to your business for further deductibility? That’s probably a stretch, but business tax law is very different from the rules that apply to the standard 1040.

The downsides of a cash-out loan to finance a business venture are clear. You are tying up all of your equity and paying mortgage premiums that reflect the increased burden. Under normal circumstances, putting your most important asset at risk is a threat if you lose your job, get sick or run into other financial difficulties. What you’ve done by tying your current home equity loan rate to the success of the business is add another, significant risk.

For that reason, variable home equity loan rates are by no means obsolete in today's market and may be a viable option for supporting your business venture. Once you've been approved for a specific amount on a line, it is totally your call how much you draw down and when you actually receive the cash. You pay interest only on the amounts you've pulled out, not the full amount of the approved limit. That helps keep your business-related variable home equity loan costs down.

A $100,000 credit line may be a far more flexible financial management tool for you than a $100,000 lump-sum cash-out refinancing, even at current home equity loan rates. If you need to use only $20,000 of the $100,000, that's all you draw down. The $80,000 balance functions as a cost-free contingency fund -- ready for action whenever you truly need it. Your monthly rate on your $20,000 may be nine plus percent, but the rate on your contingency balance is zero percent. Your choice of home equity financial tools depends on how much you intend to devote to the business.