Experienced real estate investors know the advantage of using existing equity in a home is better than pulling out cash from a savings account in most instances. Remember that when making a down payment on a rental property, while that down payment is your initial equity in the property it’s not all that liquid. Draining money from a savings or checking account means it will take some time to replace those funds with regular deposits into savings account. But using equity in your home means you don’t have to replace any funds in any account.
With an equity loan, you can decide how much you want to borrow and make an application for an equity loan. You can expect to provide copies of your most recent pay check stubs and your last two years W2 forms. Because an equity loan will take care of closing costs at the settlement table, documenting “cash to close” isn’t necessary. If you’re self-employed, you may also be asked to provide income tax returns but in most cases an equity loan requires much less documentation compared to applying for a first lien mortgage.
The funds received from an equity loan can then be used to buy an investment property as well as take care of closing costs. However, you’ll find out closing costs on second mortgages are much lower compared to when you first bought your property. The equity loan will be subordinated to the first lien and paid back over time and you can also make extra payments toward the balance with no prepayment penalty.