Home Equity

Can I Use My Home Equity to Start a Business?

By Tom Burchnell
use your home equity to start a business

Business ownership is the Other American Dream. There’s certainly something attractive about being your own boss, creating jobs, and contributing to the economy … but there’s one problem.

Starting a business costs money.

If you’re a homeowner, you might be thinking about all those mortgage payments and wondering, “Can I use my home equity to start a business?”

The short answer is yes. So is the long answer, actually, but it involves more detail.

Is Your Business Viable?

Let’s take a step back from “can” and look at “should.” Tapping your home equity often means taking out a home equity loan, and that means you’re putting your home at risk. If your business fails and you default on your loan, you could lose your home as well as your new company.

Before you think about accessing your home equity, figure out whether or not your business is likely to make it.

The Facts 

  • 1 in 12 businesses closes each year
  • Cash flow is the most common reason for closure    
  • Only half of all businesses survive their first five years
  • More than 20 percent close in the first year

Will You Make the Cut?

Odds alone won’t tell you whether your business will stand the test of time. You need to have a business model that shows where your revenue will come from and how much you can reasonably expect to make. You need to answer questions like:    

  • What unique benefit will you offer to your customers? 
  • Who is your target market and how will you reach them?
  • Is your market on a growth track?  
  • What are your operating costs? Will your revenue be enough to cover them?

If your numbers show that you’ll have enough profit to pay yourself back the money you’ve invested, great! You can start looking into ways to tap your equity.

Getting a Home Equity Loan to Start a Business – Pros and Cons

The most common ways of accessing your home equity are home equity loans and home equity lines of credit.

Home Equity Loans

A home equity loan works a little like a second mortgage. You get a lump sum that you pay off at a fixed interest rate over a specified period of time. The amount you get depends on how much equity you have, as well as your own qualifications as a borrower.

The Pros

  • Because payments are consistent, you can work them into your business budget reliably. 
  • Your interest rate won’t go up if the market changes. 
  • You’ll pay a lower interest rate than you would with a credit card. 

The Cons

  • You might have to pay an early-termination fee if you pay off the loan early.
  • If property values decline, you might end up owing more than your home is worth.
  • Your home is your collateral. If you default, you could lose your home. 
  • Because first mortgages take priority if you end up in foreclosure, your lender could send a defaulted loan to collections and damage your credit for years to come.

Home Equity Lines of Credit

home equity line of credit, most commonly known as a HELOC, functions more like a credit card than a mortgage. Your lender approves you to borrow a certain percentage of your equity and sets a draw period during which the money is available.     

Once you’ve started borrowing, you start making payments. You will continue to make payments once the draw period ends. This is known as the repayment period and can continue for up to 20 years.

The Pros

  • You can borrow from your HELOC for business expenses as they arise, so you’re not paying interest on money you don’t use. 
  • You may be able to arrange interest-only payments while you’re still borrowing.    
  • If market rates fall, so will your interest rates.

The Cons

  • Variable interest rates mean that your payments could go up unexpectedly. 
  • It’s easy to get distracted and lose track of what you borrowed, leaving yourself with a financial burden during repayment. 
  • Your lender could freeze your line of credit unexpectedly, leaving you without access to business capital.    
  • As with a home equity loan, you could lose your home if you default.

Qualifying for a Home Equity Loan or HELOC

To use a home equity loan or HELOC for business expenses, you’ll need to qualify as a borrower. Usually, you’ll need: 

  1. At least 12 months as a responsible mortgage borrower 
  2. A minimum of 15 to 20 percent equity in your property    
  3. A credit score of at least 620, though 740 or higher is ideal 
  4. A debt-to-income ratio of no more than 41 percent    
  5. A record of steady income 

By this point, you’re probably wondering if there’s any way to tap your home equity without going through the loan application process only to put your home at risk.

The answer again is yes.

The Sale-Leaseback Alternative

Traditionally, the only way to liquidate your home equity without taking out a loan was to sell the house and move. That’s a major disruption to your life and your household’s life, especially if you’re in the process of buying or starting a business.

With a sale-leaseback, you don’t have to make that decision. Just sell your home and collect the agreed-upon equity. But instead of moving, you stay in place as a tenant. Without the hassle or emotional upheaval of leaving your home, you can focus on starting and growing your business.

How Does It Work?

When you sell your home, you sign a leaseback agreement specifying the purchase price, rent, and lease term. You keep paying rent until you’re ready to buy back your home or move. 

It’s a particularly attractive option for aspiring business owners because you don’t need proof of income or great credit. It’s all about your home and value.

Key Takeaways

If you’re a homeowner exploring financing solutions for new business opportunities, consider how you can can use your home equity to start a business. Consult a financial advisor today to see what options are available to you.

Home Equity
Home Equity Line of Credit
Home Equity Loan
Small Business
Tom Burchnell
Written by Tom Burchnell
Director of Product Marketing

This article is published for educational and informational purposes only. This article is not offered as advice and should not be relied on as such. This content is based on research and/or other relevant articles and contains trusted sources, but does not express the concerns of EasyKnock. Our goal at EasyKnock is to provide readers with up-to-date and objective resources on real estate and mortgage-related topics. Our content is written by experienced contributors in the finance and real-estate space and all articles undergo an in-depth review process. EasyKnock is not a debt collector, a collection agency, nor a credit counseling service company.