Instant Equity Basics
Many people sign up to purchase brand new homes.
Usually at the time of signing the purchase agreement the home is not yet constructed or finished.
Sometimes this process can take months or even over half a year. During this time the appraisal value of the property will continue to rise.
The purchase price on the contract will remain the same, regardless of how the market value changes.
If you signed up to purchase a $300,000 property with 100% financing that is the price you will have to pay when the property is ready and you can buy it.
On the day the newly constructed property is finally available you may find that the market value of the property has risen to $350,000.
When you are purchasing a property the mortgage lender will typically use the lower of the purchase price or market value.
You will only be able to get a loan for $300,000 on this property.
Exploiting Your Instant Equity
Even though the appraisal may show the property is worth $350,000 now the contract price is $300,000. The $300,000 price is what the loan is made on.
After you have the property you will have $50,000 in equity. This is your «instant equity».
You can leverage this immediately, usually to get a lower monthly payment.
Many lenders offer refinance loans immediately after a purchase that allows a borrower to use the instant equity to refinance. These types of refinances are usually only to lower the monthly payment and interest rate, not to get cash out.
Lenders typically require you to own a property for 6 months or a year before they will allow an increase in property value to get you cash out. This is known as «seasoning».
There are now a few lenders that will even lend on properties without seasoning and provide cash out. These are newer loans offered by some specialized lenders.
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