Taking money from your home can help start your dream business. First, find out how much money you can get. Look at what your home is worth today. Then subtract what you still owe on it. Banks will often let you borrow up to 80% of your home's worth. You need good credit and proof that you make enough money. Shop around at different banks to find the best deal. Look at how much they charge and how long you have to pay it back. Keep some money saved up for six months of bills. Make sure you have good insurance too. Pick the choice that works best for your business dreams.
Understanding Different Refinancing Options
When you want to get a new loan to replace your old one, you need to look at all your choices. Banks offer good rates if you have good credit. You can also get a loan based on how much your home is worth. This is called a home equity loan.
If you want to get cash from your home's value, you can do what's called a cash-out loan. If you own a business, special SBA loans might help you. Online lenders can give you quick answers, but they cost more. You can also borrow money from other people through special websites.
Look at what each loan costs. Check what you need to qualify. Think about what feels safe for you and your money. Take time to pick the best choice for you.
Calculating Your Available Equity
Want to know how much money you can get from your home? Let's find out!
First, get someone to tell you what your home is worth today. This is called an appraisal. Then, look at how much you still owe on your home loan. Take that number away from what your home is worth. This tells you your home equity.
Banks will let you use up to 80% of what your home is worth. Let's say your home is worth $400,000. You still owe $200,000 on it. This means you have $200,000 in equity. The bank will let you use up to $120,000 of that money.
But wait! You need to pay some fees to get this money. These fees cost between 2% to 5% of what you borrow. This means you'll have a bit less money to use for your business.
Evaluating Business Funding Needs
You need to know how much money your business needs before you borrow from your home. First, make a list of all your costs. This includes things you need to buy like tools and supplies. It also includes costs like permits and rent.
Next, write down how much money you need to run the business for six months. Split your costs into two groups: costs that stay the same each month and costs that change.
Add 20% more to your total to be safe. Remember that you might make more money in some months than others. Talk to other business owners to check if your numbers make sense.
Be very careful with your math. If you don't ask for enough money, you could lose both your business and your home.
Home Equity Versus Business Loans
Getting money for your business can come from your house or from a bank loan. Let's look at the best way to help you choose.
A house loan lets you use the value of your home to get money. A bank loan is just for your business.
Get mortgage-smart in just 6 minutes
Get Mortgage Funding delivers easy-to-understand updates on home buying and financing options right to your inbox, so you can make informed decisions with confidence.
| What to Look At | House Loan | Bank Loan |
|---|---|---|
| Cost to Borrow | Lower | Higher |
| What You Risk | Your Home | Business Things |
| How Fast You Get Money | Quick | Slow |
If you use your house for the loan, you can get money fast and pay less. But if things go wrong, you could lose your home.
Bank loans cost more, but they keep your home safe. They only use your business stuff as backup.
Think hard about what feels right for you. Ask yourself:
- How much risk can I take?
- How good is my credit?
- Is my business new or old?
Most people with old businesses like bank loans better. They want to keep their home and business separate. New business owners often use their house to get started.
Preparing Your Refinancing Application
Let's make getting ready to refinance easier.
First, get your money papers together. You need papers that show:
- How much money you make
- Your tax forms
- Your bank info
Next, check your credit score. Think of it like a money report card. You can get this score from three big companies that keep track of how well you pay your bills.
Last, pick who you want to help you with your loan. You can go to:
- A bank near you
- A credit union
- An online bank
Pick the one that feels right for you and your money needs.
Gather Financial Documents First
Getting ready to refinance? Let's make it simple! You need to show the bank that you can pay back your loan.
First, get your tax papers from the last two years. Find your pay stubs from the past month. Grab your W-2 forms too.
Next, find your house papers. You need your current home loan bill and your home insurance plan.
Get your bank papers from the last two months. This means your checking and savings papers. If you have money in other places, get those papers too.
Make a list of what you pay each month. Write down your credit card bills, car loans, and school loans.
If you make money from rent or other work, get proof of that too. The bank wants to see all the ways you earn money.
Calculate Current Credit Score
Your credit score is like a report card for your money habits. You need a good score to get a new home loan. Most banks want to see at least a 620 score. If you get your score up to 720 or higher, you can get better loan deals.
You should look at your credit score from three big companies: Experian, TransUnion, and Equifax. Think of them as teachers who grade how well you handle money.
You can get a free look at your credit once a year from AnnualCreditReport.com. Check for any mistakes. If you find wrong info, tell the credit companies right away. They take about a month to fix errors.
Keep an eye on your credit score. The higher it is, the less money you'll pay for your new loan. Even a small boost in your score can help you save lots of money over time.
Choose Right Lender Type
When you want money for your business from your home, you can talk to different types of lenders.
Big banks can give you good rates, but they're strict about who gets money. They also take a long time to say yes or no.
Credit unions are like banks that you can join. They're friendly and work with you on payments. But they mightn't be able to lend as much money as big banks.
Online lenders work fast and might say yes even if your credit isn't perfect. But they ask for more money back when you pay them.
Loan helpers, called brokers, can find many different loans for you. They help you pick the best one, but you have to pay them too.
If you want a special business loan from the government (SBA), some lenders know how to help business owners like you get these loans.
Managing Risk and Contingency Plans
When you borrow money to grow your business, you need good backup plans. First, save enough money to cover six months of bills – both for your home and business.
Get good insurance to protect your family if something happens to you.
Think about what could go wrong and plan for it. Bad times in business or new rivals could hurt your sales.
Watch your money closely and know when you need to fix problems. Have other ways to get money ready, like a backup credit line.
Stay on good terms with banks and keep your credit score up.
Tax Implications of Refinancing
When you get a new loan for your home or business, it can change your taxes.
Think of it like trading in your old loan for a new one.
If you use the money from your new loan for your business, you can save on taxes.
But if you use it for your home, the rules are different.
You need to write down how you spend the money.
Keep all your records in a safe place.
That way, you can show where every dollar went.
It's smart to talk to someone who knows about taxes.
They can help you make good choices.
They'll also help you know how much you can save on taxes each year.
Building Your Business Credit Score
Building good credit for your business helps you get better deals when you need money.
First, keep your own money and your business money in different bank accounts. Get credit cards just for your business. Pay everyone on time – this is super important!
Tell the big credit companies about your business. These are places like Dun & Bradstreet, Experian, and Equifax. Work with sellers who tell these companies when you pay them.
Don't use too much of your credit cards.
Look at your credit reports often. If you see mistakes, fix them right away. Keep all your business papers up to date. This means your permits and tax forms.
You can also ask for help from companies that know how to build good business credit. They can show you what to do step by step.
Securing The Best Interest Rates
Want to get the best rate for your loan? Talk to three or more banks instead of just one.
First, look at your credit score. Fix any mistakes you find.
When you see a rate you like, ask the bank to lock it in. This way, the rate won't go up while you wait for your loan.
Compare Multiple Lenders First
Getting a better loan starts with looking at what different lenders can give you. Ask at least three places what they can offer. Check with banks, credit unions, and online lenders. Each one has their own way of setting rates.
Don't just stick with your old lender. They may not give you the best deal. Write down what each lender offers:
- The interest rate
- The fees you must pay
- How long you can take to pay it back
- What you need to qualify
Many lenders let you check their rates online. This won't hurt your credit score. When you're ready to apply, do it all within two weeks. This keeps your credit score safe.
Make a simple list of what each place offers. This helps you pick the best deal for your money.
Check Your Credit Score
Want better loan rates? Check your credit score first! It's like your money report card that tells banks if they can trust you.
You can get a free credit report once a year. Ask for it from the three big credit score companies: Experian, TransUnion, and Equifax.
Look at your reports with care. Make sure everything is right. If you see wrong info, tell the companies right away to fix it.
Try to get a score of 700 or higher. This will help you get better rates.
To make your score better:
- Pay your bills when they're due
- Use less than a third of your credit cards
- Don't ask for new credit cards for a few months
These simple steps can save you lots of money when you get your new loan.
Consider Rate Lock Options
When you get approved for a home loan, you can lock in your interest rate. This means your rate won't go up or down before you close on your home. Most banks let you lock your rate for 30 to 60 days. You can get more time if you pay extra.
You have two choices. You can lock your rate right away, or you can wait and watch what rates do. If rates are very low or going up, it's smart to lock now. But if you think rates might go down, you might want to wait.
Make sure your rate lock lasts at least a week longer than when you think you'll close. This helps if there are any delays.
Also, ask your bank if they've a "float-down" option. This lets you get a lower rate if rates drop while you're locked.
