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Business Dilemma: Should I Refinance My House to Fund My Business

Business Dilemma: Should I Refinance My House to Fund My Business

Everyone would love to start a business in their name. It is a beautiful dream to become a boss, have a lucrative business, and make all the financial decisions about the business without leaning on someone's shoulder for advice. However, Loan Advisor can help you make appropriate decisions, especially on refinancing. As far as the whole idea sounds convincing, starting a business from scratch comes with its downsides.

One of the problems is, unless you have considerable savings or a business partner, you will have all the financial responsibilities on your shoulder. If you are not keen, your business may not last a decade. That is when some business owners will settle for home refinancing to raise some cash to fund a business. However, for new entrepreneurs thinking about refinancing their houses to support their businesses, is it a wise idea?

Lately, home refinancing has been a decision for many homeowners, especially with the current attractive rate. For instance, a 30-year conventional mortgage is currently ranging from 3%, while a 15-year term is ranging from 0.5%. According to the Mortgage Bankers Association, refinancing applications increased by more than 55 per cent. This is a clear indicator that most homeowners are taking advantage of the historically low mortgage rates to refinance their homes and make extra cash.

However, refinancing your home to fund a business comes with a different dimension. Why? Refinancing your home means getting into another mortgage, and using the extra cash to set up a new business is a risky step if not estimated well. Therefore, before thinking about refinancing your home to fund a business, you need to take a look at the following things first.

How Much Do You Owe?

First things first, how much do you have on your mortgage or any other loan? Knowing all your debts before refinancing your home helps you to avoid additional obligations. Suppose you have a huge mortgage, paying off your debts before starting any business is a better idea. Of course, it sounds crazy to put off your dream of becoming a boss because of minor obligations, but it is worth it than starting a business and spending quality time dealing with debts.

How Much Equity Do You Have?

If you recently bought your home, the last thing you should think about is refinancing it. This is because the house has not built up enough equity beyond your down payment. For example, if you can refinance your home up to 100 per cent of its value to start a business, you risk your business falling and losing your home because there will be no extra cash for monthly payments. This will strain your business leading to losses. Therefore, refinancing your home to fund business if you don't have enough equity is a risky step. Instead, forget about the business to build up enough equity for your home.

Getting an Appraisal

Has your home appreciated or depreciated? The rental market in your location could be far different than when you bought your home. Maybe it has gone up or dropped. You should know about the current value of your home before thinking about refinancing it. Therefore, getting an appraisal done to your home is the best way to determine the value of your home. Refinancing your home to fund a business in a depreciated market will only lead to losses. You will not raise enough capital to start a business or pay for a down payment, which is a risky step to your company and home.

Getting A Lender

Do you have your trusted reverse lender? Or are you thinking about getting a new lender who will facilitate a home refinance? Getting a trustworthy lender before thinking about funding a business is an excellent idea as they will advise you on the best decision to make. Rushing with the favorable interest rates may land you in extra debts if you choose a wrong lender or a financial institution that is not reputable. Therefore, having someone you can work within refinancing your home will help you come in agreeable terms that will favor funding your business.

Determining the Business Cash Flow

Assuming you have refinanced your home to set up a business, how much do you think the business will bring each month? Will that business pay for its bill, feed the family, and also pay a certain percentage of your mortgage? If it will not, then refinancing your home to fund a business is not a better idea. There is no sense in funding a business that will land you in debts and make you lose your home too.

The Type of Business to Fund

The type of business you are funding with a refinanced home is also a vital factor to consider. Risking your home on a business with a lot of risks can backfire in case the business cannot repay the loan. For example, starting a restaurant and a retail business does not guarantee enough cash to pay down the mortgage because the business can collapse any time if not carefully managed. Alternatively, using home equity on inventory can be a risky idea because if the inventory's value drops or no one buys it, you will lose your money. Therefore, before refinancing your home to fund a business, you need to examine every business to determine its possible risks. You can choose service industries that do not deal with a product that the consumer may not like.

Conclusion

From the overview, refinancing your home to fund a business is a risky step and depends on several factors. It is not something to wake up one morning and decide to refinance your home. However, the need to be self-employed and be in business ownership can push you to make extra cash from your home. You may have little time to think if it is the right decision or not.

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