I bought a house in my home state seven years ago. I bought a house using an FHA loan and down payment assistance. A few years ago, I moved out of state and kept my home as a profitable property. My intention was and has always been to keep this house permanently and have it as part of my retirement plan (along with some others hopefully in the future). I have a lot of equity in my home because the value of my home has increased since I bought it (it’s now worth about twice as much as I owe it).
I am writing to you because I am wondering if this is a good option for me to withdraw equity for my home to use for down payment on my next home. My credit is around $ 750, I have no debt other than that mortgage and the small car payment that will be paid off in a year.
However, my savings are in a deplorable condition. Two removals out of state in the past few years, the loss of a job (and subsequent wage cut) and other personal medical expenses have made this account a real beating. I am currently renting an apartment and would love to buy my next home as I consider it another long term investment not only in my financial well being but also my mental / emotional well being.
Since I moved out I have the same tenant in the house and the property flows well. Currently, the mortgage rate is 4.75% and the assistance received in the form of an advance payment was $ 7,500. If I buy capital I would have to pay it back (understandably) so that also needs to be considered. I earn a decent living and work on the side to help speed up my savings. That being said, it can take some time to save 20% on your down payment these days.
First of all, I would like to commend you having come out of such a difficult series of failures and it seems to be quite a strong financial condition. You can clearly see the value of building a rescue fund for that rare rainy day, week or month.
Therefore, my next piece of advice may disappoint you: I think it is in your best interest to hold off buying a home for a while. And before you silence me – I understand, no one likes it when someone says no – I think you should reconsider everything you just went through.
You’ve come out of job loss, multiple removals, and debt-free medical emergencies because you have done what so many Americans either don’t or can’t: you saved your money. Rebuilding these savings should be your goal for now.
Here’s why: suppose you were supposed to cash in your capital on your investment property – or by refinancing a home equity line of credit – and then the bottom goes down again. From what you’ve told me, you don’t have much savings in your personal accounts. If you have used up all the capital you have withdrawn from your investment property to down payment on your new home, you will not have this as a resource to lean on.
Imagine what will happen next. You may be late in paying off one or both of your mortgage loans, depending on how much money you earn with rental income. This would jeopardize your apartment, your credit and your emotional well-being. You may be forced to sell your first home, but then you will lose your retirement financial opportunity.
Cash-out and HELOC refinancing are not only more difficult to obtain for investment properties, but also more expensive.
This does not mean that you should never withdraw some equity from that first home to buy a second home. However, keep in mind that cash-out and HELOC refinancing are not only more difficult to obtain for investment properties, but also more expensive. You will pay higher interest than the house you plan to live in, and the fees can be high.
You also assume that owning a home is the better financial move. It may be, but it’s not obvious. Of course, when you own a home, you reap the long-term benefits from the increasing value of this investment, not to mention the added benefits of not having an owner. But you’re also responsible for a lot of other expenses, as I’m sure you are aware of, that offsets some of these benefits. In many parts of the country, renting and investing savings in other vehicles, such as stocks or mutual funds, can provide a much better financial return than owning a home.
Take time to rebuild your savings. You don’t necessarily need the equivalent of 20% of the down payment saved, but at least enough to cover three to six months of your worst-case expenses. At this point, do some calculations to make sure home ownership is the best financial option you can go for. If so, consult a financial advisor or loan officer to determine the best course of action to refinance your investment property mortgage and take out a new one – the lender may be willing to secure a deal for you.
Good luck on your journey – based on how you’ve been doing so far, I’m confident you’ll come out stronger on the other side.