Using your Home Equity as your Down Payment?

Question

My Husband and I have been saving our money for our down payment for our first buy and hold property (Hopefully).  We do have some equity in the house we live in now. My question is it a smart decision to use our equity as the down payment?

Thomas S. · Answer

HELOC is the best way to use your equity to earn income. It's sitting doing nothing so why not make it earn it's keep.

I have a 200K line on my home I use for all my investing. But it does come down to personal risk tolerance. Worse case if you lose everything you owe money on your personal home.

Victoria L. · Answer

Account Closed  Wow! That is what I keep thinking will happen to me but before we decide to take our heloc we want to have a good amount saved as well just as a back up plan.

Patrick M. · Answer

Victoria- We have always been in the same boat. Our savings go into 401ks and 529s mostly, so it was really our best option. We had built up a lot of equity and we really were itching to get an investment property. We wanted to have the money set aside for the lowest rate. So a HE worked out better than a line of credit. It also kept us honest by knowing we could afford to pay it w/o depending on the income of the potential property and ensured we would not go above our means.

Additionally- we had the money at the ready. And so began what seemed like a long and tortured search for a property.... When we lost out on our last bid on a beautiful 2 family I was ready to scream. Around my area you simply can't compete- there are too many people paying outrageous prices and offering cash on 2 families. I was ticked off when my "mentor" told me we didn't get it because it wasn't meant to be. Argh...

But, not 4 weeks later we had a 5 family fall into our lap and we were able to get it done because we had the cash on hand and the seller held the note. When I look back on the numbers from that 2 family- I would have struggled to realize a profit and I would be stressing at a vacancy... Wasn't meant to be.

(After another awesome event) 8 months later we refinanced our mortgage to pay off the HE and other necessary debt. Took advantage of a 3% rate at 10 years. We are working away and having a blast.

Patrick M. · Answer

I agree it is a personal decision. My wife and I decided we wanted to go this route a couple years ago. We pulled out a home equity at a low rate and placed it in the bank- less than a line of credit. This ensured we could handle it as we shopped around for an investment property... if not I could pay it right back.

It was one of the best decisions we have made as a couple... and it keeps getting better.

Carlos Tavares · Answer

i would say its more of a comfort level decision... to tell you the truth . 1 week ago i decided on not purchasing any investments for 3 years even though i have equity in my primary , i decided to wait and invest all my extra disposable income into debts then primary then my duplex (kinda like Dave Ramsey) but i will be able to purchase 2 to 3 in one year in one year when time comes because i will have primary paid off and some of duplex paid off and hopefully a huge chunk of equity built up.. I believe its the best decision i have made in past years since i actively thought about investing.. figure out a plan and make a move on it , I know its much safer then most would like but market trends are weird in my area and wife/family is more important for me now to stabilize then housing market and i sleep better at night and it can change/adapt later, Im in no rush,  hope this helps

Nick Vehr · Answer

@Victoria L. So we have done something similar on our first house. We recently bought a house and paid cash out of our heloc with it. The reason I chose to do so was i was going to use the excess cash to rehab and then rent it out. I would then refinance 6 months down the road and pull cash out, repay the heloc and be left with a little bit of cash.

Things went kind of crazy, plumbing disaster after plumbing disaster, we ended up going about 5k over budget because we didn't plan for drainage issues, plumbing. It just kept getting worse and worse, but we stayed on course.

Found a tenant, went to move her in, she went a bit crazy made some weird demands, and we went different directions. I now have someone that I met through bigger pockets, placing a tenant and i will be handing it off to a property management company after so I will be completely hands-off.

But, the house will still cashflow 180 a month, with a little money coming out on the refinance with a 75/25 30-year. At the end of the day, I learned more in the process than I ever would have researching, and I'm a big time researcher.

My advice is, if you're going to use equity in your prime residence. You need to be sure you have multiple exit strategies, and a lot more cash than you think you need. Unless of course you have access to other funds. Run all your numbers assuming the worst will happen and be super picky on the deal. In the end if you can do those things it'll all work out.

Good Luck!!

Jay Hinrichs · Answer

I would get some more real world investing knowledge before you leverage up.

for most this is a poor idea... espically if your W 2 and cannot make money in big chunks.

this was one of the 3 things that sunk the economy in 08   over leverage.

@Nick Colamarino  I am one of those guys Nick is talking about  NO WAY NO how.. its my safety net as it were.  paid off primary in a high value west coast real estate is a nice nugget to have tucked away.

Victoria L. · Answer

Thank you all for the advice. Can someone please explain exactly how the Equity works? Are the payments usually high or what?

Using your Home Equity as your Down Payment?

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