Ability of using equity to finance down deposit on new home?
Hi Everyone. I have a substantial amount of equity in one of my homes, and am looking to purchase a second home sometime in the summer. I do not have money for a down payment, however, I do have more than enough for closing costs. I was wondering if it would be advantageous to take out equity on the one home for the 20% down payment on the second home. Do mortgage companies frown upon this action, or is it encouraged? Would I get advantageous interest rates in this case, or similar rates as to doing 100% financing? Just so you know, the home I am looking to purchase is a duplex, however, it will be a primary residence. I know interest rates are generally higher for duplexes. Just a thought I had, wanted to know if it would be worthwhile to leverage the one homes equity to purchase the new home. Thanks! Hi, I've checked income levels, and we (to be more specific, the loan will be between me and my brother) will qualify for the loan at a 7% rate (assuming 28% front load). Also, when I say substantial amount of equity, I mean 100%, I own the home outright, and the down payment won't come close to the 80% mark (more like 40%). Would it be better to get the loan on my current home before I finance? Or should I go to the lender, and ask them to evauluate both options. Thanks for all of your help! Now I just have to sell the idea to my brother (he is a co-owner of the one home).
Public Comments
- That is a fine idea that has been used by real estate investors for years.
- I just did that about seven months ago...except I went from a duplex to a single family home. The major advantage of using you equity to purchase more property is that you can avoid pmi with 20% down and conventional financing. The major disadvantage is that a home equity loan is fairly expensive. I borrowed 90k against my equity and it costs me almost $700 a month. I bought my new home through a bank and got approved before the home equity loan even hit my credit so they couldn't complain about it! If you think your duplex will cover the cost of the mortgage and the home equity loan than go for it! Otherwise you will be footing the bill for the second mortgage on your primary home. Good luck and hope this helps.
- You are exploring the concept of leverage. That is how investors succeed in the real estate world, but it is also a risk. Generally speaking, your rates will be lower with a 20% cash down-payment; which is how the lender will view it for the property you are proposing to purchase. Now when you say substantial equity in the first home, just how much are we talking? If you leverage more than 80% of the value of that home then you will be paying higher interest rates on that loan. Do your homework in order to get the best deal available. However, your proposal is tried and true. Best of luck
- Great question. You are going to get the best rates if you are able to put the 20% down on the new 2nd home, however you really need to do a little evaluation and see if the interest rate on an equity line of credit on your primary is worth it or if a slightly higher rate for doing 95-100% financing is going to be better for you. Your credit score, mortgage history, and income are going to dictate most of those factors. If you can go full document then 100% is most likely not going to be that big of a rate hit. If your going stated on your income then you should put at LEAST 10% down on your 2nd home purchase. Real Estate as you obviously know is all about leveraging your assets :) You can find some calculators that may help you on www.fivestarsmortgage.com. P.S. depending on where you are buying you should really try to get the seller to pay your closing costs. In almost every purchase I see happening lately the sellers are paying a portion of not all of the buyers closing costs.
