How to Use Your House’s Second Mortgage to Buy a Business
by Melvin Richardson
1. Find out how much the business will cost. You need to know how much the business is being sold for. Then you need to have an evaluation performed to see if the business is profitable and if this is a good price. An audit may have to be performed to make sure everything is in order. You may have to put together a team that includes an accountant, attorney and your banker to make sure things are in order. According to, this is considered to be an acquisition team. Make sure there is adequate cash flow and the business has future potential. If everything is OK, you should prepare to make your purchase based on what the business is valued at.
2. Determine how much equity is in your home. The amount of equity in your home will determine if you can purchase the business. Take the fair market value of your home and subtract any outstanding balances owed. For example, if your home is valued at $200,000 and you owe $80,000 the equity, in your home is $120,000. You can use $120,000 toward the purchase of the business. Some lenders will lend you only a percent of the fair market value, such as 75 or 80 percent. If your mortgage company or lender will lend you 80 percent of the fair market value, then you can only borrow $80,000 ($200,000 x .80 = $160,000 – $80,000).
3. Go see your lender. If you visit your bank where you have your second mortgage, the bank teller can transfer the money right into your checking account. You can then issue a personal check to the business owner for the purchase. Find out who the check should be payable to. Another option is asking for a cashier’s check if the seller of the business prefers this method of payment. The amount you use for the purchase will reduce the equity in your home by the same amount.
4. Finalize the deal. Make sure you have all paperwork prepared, including legal documents. Your acquisition team may need to attend the closing or signing to make sure everything is finalized legitimately. You want to make sure ownership transfers to you as it should.
Don’t rush to make the purchase. Give your acquisition team a chance to make their assessment of the business. If the business fails, you will lose your money. Your home will be at risk of foreclosure if you cannot make the payments on the home equity line of credit.
Make sure you know what your payments will be on the HELOC. The rate is usually variable, which means the rate could increase at some point in the future. A rate increase can cause your payments to increase.