Tuesday, September 3, 2013

Pros and Cons of Using Your Home's Equity to Buy Another Home

Although interest rates have risen over the last six months, they are still relatively low. In many markets, home sales have begun to accelerate, which could make this a good time to invest in real estate.

Like many, you may want to buy a second home - for vacation, retirement, or as a rental - but find yourself without cash on hand to make a proper down payment.

Many opt to use equity from their home in order to buy another. Equity is simply the difference between what you owe on your mortgage and your home's value on the market. If you owe $75,000 on your home but it's worth $155,000, your equity is $80,000.

As with any financial move, there are risks, but there are some advantages to using equity to purchase another home.

The pros

Banks can offer more favorable terms
Costs of loans (title search, etc) are typically lower
If you have enough equity in your first home to pay cash for a second home, you'll always have a free place to live

The cons

You'll be increasing your monthly mortgage payment
Increased risk of foreclosure in the event of job loss, etc
You're increasing the amount you have in one type of investment
Mortgage interest paid on an equity line or loan on your home might not be tax deductible
Your home would be subject to foreclosure if anything went wrong with the deal

There are some options when it comes to using the equity in your existing home to purchase another. Talk to your mortgage lender and your tax attorney to discuss the best option for you.