One of the main advantages of owning a home is to have equity. You can use the capital in your home to buy a business. This can be done by taking out a second mortgage. A second mortgage loan is also known as a home equity loan or HELOC (home equity line of credit). Find out what type of loan will help you reach your financial purposes.
Find out How Much the Business Will Cost
You should know how much the business is selling. Then, an evaluation must be done to see if the business is gainful and whether this is a good price. An audit can be required to ensure everything is in order. You may need to put together a team in which includes an accountant, a lawyer, and your bank representative to make sure everything is in order. This is considered an acquisition team according to Entrepreneur.com. Confirm there is an adequate cash flow and that the business has a future perspective. If everything is fine, you must prepare to make your purchase according to what the business is valued.
Determine How Much Equity Is in Your Home
The amount of capital in your home will determine whether you can buy the business. Take the fair market value of your house as well as subtract the outstanding balances owed. For instance, if your home has a value of $ 100,000 and you owe $ 40,000 in equity, your house is $ 60,000. You can use $ 60,000 to purchase the business. Several lenders will lend you just a percentage of fair market value, for example, 70% or 80%. If your lender will lend you 80% of the fair market value, then you can only borrow $ 40,000 ($ 100,000 x .80 = $ 80,000 – $ 40,000).
- Go See Your Lender
When you visit your bank where you have your second mortgage, the cashier can transfer the money directly to your checking account. Then you can issue a personal check to the owner of the company for purchase. Find out who the check should be paid for. The other option is to request a cashier’s check whether the seller of the company prefers this payment method. The amount you use for the purchase can reduce the capital in your home by the same amount.
Finalize the Deal
Make sure that you have all the papers prepared, as well as legal documents. Your procurement team may require attending the closing or signing to ensure that everything is legitimately completed. You want to ensure that the property is transferred to you as it should.
Do Not Rush to Make the Purchase
Give your acquisition team the opportunity to do your business evaluation. When the business fails, you can lose your money. Your house will be at risk of foreclosure if you can’t make the payments on the HELOC.
Be sure you know what your payments will be in the home equity line of credit. The rate is generally variable that means the rate could rise at some point in the future. An increase in the rate can cause your payments to enhance.