Don’t know what to do next

[Aaron Proctor]

Ok so I feel kind of lost. My wife and I live in Raleigh, NC and own a townhome. With about 60,000 in equity. It would make a great rental for a would be first time landlord. We would probably make 250 a month on it. We want to buy another townhome to do this process all over again. But don’t have 20% down payments and would have PMI. Is leaving the 60,000 in equity on the first home a bad idea? Or is it ok to leave it there and let it keep growing? Are some of you accepting of paying PMI on a property?

[Eric Weireter]

Hi @Aaron Proctor ,

Question #1 is: Will your HOA allow renters? The answer isn't always yes.

Here are some options for you:

1. Do a cash-out refinance on your townhome, use that money as down-payment on a new home. however, if you have an awesome low interest rate you would lose it. 
2. Capitalize on the equity that has been built by pulling out a HELOC on your townhouse . Then utilize the HELOC to help fund the down payment on your second (new) property. Of course there are risks associated with that such as increasing your debt, but most HELOC payments are a minimum of 1% of the outstanding balance. I can recommend a couple credit unions in NC that would be good to use, one of which doesn't charge closing costs.
3. Sell the townhouse (from a tax perspective). You can unlock those capital gains tax free with no stress, worry, or headaches associated with owning a rental property. Though, you only need to live in the property 2 of the last 5 years to receive the capital gains tax-free. So, in your situation, you could rent the property out to see if you like being a landlord. Then you would have 3 years to sell the property without having to pay any capital gains tax. 

I found the HELOC looks like the best option because refinancing away from a low interest rate adds to how much you pay the bank when you refinance. Look at how much more you would pay on principal & interest by refinancing and you will think more about selling or doing a HELOC to keep your loan with low principal and interest.