How to buy 2nd home?

Question

Hi,

I currently live in Novato, CA where we bought a home 3 years ago that has gone up quite a bit in value. I have no experience in real estate. We are considering renting it out and moving out of state for a year to try something new. We currently have a 15 year fixed and owe 190k on it. Purchase price was 462k and its valued at 690k (zillow.) Renting will give us +$1000 cash flow/month.

We currently have 25k in savings acct, and want to buy 2nd home for around 325-450k.

What is the best way to tap into equity to get enough money for down payment on 2nd home? We are looking at a down payment of 20% to avoid PMI, so roughly 70k-90k in cash to put down, plus potentially another 50-75k for improvements if needed.

I would rather not refi our first home. So options would be HELOC or Home equity loan, correct? How much should I put down on 2nd home, which will be a 30 year mortgage? Are rates low enough whereas PMI payments wouldn't really matter?

Thanks!

Jonna Weber · Answer

Welcome to BP  @Casey Botts -  first question - you mention you want to move out of state for a year.  In that case, why purchase a home in the new location?

Assuming you would want to own and live in and/or rent out the  homes long term,  you are in a good position, with several options.  This is a matter of personal preference and comfort for you. I personally don't like the idea of PMI, but the most straight forward way to go would probably be a conventional with 5% down.  (assuming you qualify for payments on both homes without rental income).  Otherwise,  a HELOC is not a bad way to go.  If you don't have a great lender yet,  that is the next step. They can line out your options so that you can compare.

All the best to you!

Luka Milicevic · Answer

Avoid PMI if you can. Since it's going to be owner occupied you might be able to get a conventional 30 year for 10% down. Talk to a bunch of lenders.

The $1k cash flow; make sure you take into account more than just your PITI. Look at repairs, cap ex, vacancy, etc. since you're out of state, make sure to budget for, and get a GOOD property manager. Interview a bunch of them before you pick on and ask for references. Call all references

You could also do a HELOC all In one loan on your existing home and use the equity to put down on your new home.  Google HELOC all in one loans to see what they are if you're not familiar.

You could also ask a private investor to put up the down payment if you find a good deal, fix up the property and refinance it and pay back the investor.

Also if you come across a free and clear property, ask the owner if he/she wants to owner finance

Casey Botts · Answer

so i would be basically taking out a home equity loan to secure down payment on a second house, then financing a conventional 30 year fixed.

So i would be paying my 1st mortgage (paid for +$1000 cash flow from renters) my home equity loan of 100k, and my 30 year fixed on a roughly 350-400k home

Im not savvy enough to know about adjustible rates and i have 0 credit card debt so the heloc scares me. I think a home equity over long term (10+ years?)would be best, with the option and intention of paying it back asap.

Does this all sound like a decent plan, assuming income requirements are met and not a factor? Am i making the most out of my $? Is 20% down the best option or could i save on my home equity loan by taking less, putting down less, and paying more on my convential loan?

Is there a wrong answer here, or will anything pretty much be better than nothing?

Jerry Padilla · Answer

@Casey Botts

Yes, your options are a HELOC or Home Equity Loan...... There are a few things to think about though.

Do you plan on borrowing this money long term? If you do, than you need to think about the long term interest rates.

HELOC's although there are no closing costs upfront, have interest rates that can go up - over time your interest rate could end up much higher than the conventional cash out mortgage. You have a lot of equity giving you a lot of borrowing power! You could use this cash to purchase investment properties as we'll, increasing your cash flow.

Home equity loans usually have higher interest rates than conventional mortgages.

For a conventional loan, they do require closing costs, but it is a one time cost to pay for the lower interest rate that will be fixed.

Casey Botts · Answer

thank you,

We want to rent for a year to figure out what neighborhood to eventually buy in, but the intention is to buy a 2nd in the long run. Right now our limiting factor is cash for the down payment but we are way under our means right now.

Long term i envision paying off our first in 12 years and keeping it as a rental. Yes i know all the income will be taxed at that point but i believe we will save more rather than paying the interest over 30 years. This is why i dont want to refi.

So to get a lump sum to put down for 2nd, i think a home equity loan would be safer rather than an adjustible heloc, correct?