Use Home Equity Loan As Down Payment On 2nd (primary) Home?

[sqa4life]

Hello,
Here is our situation.
Our current primary home is valued at 326k (based on zillow); outstanding loan balance is 205k, 15 yrs fixed @ 2.8%. Monthly payment is 1500 + tax = 1900. We wanted to find a bigger home in a better school district. So, we tested the water by posted our house on Craigslist for rent @ 1900/month, 2 yrs contract agreement required. We received at least 10 calls within 4 hours; they're fighting to check out the house and a few were interested in a 2 yrs contract or longer. Didn't know the rental market is so HOT

Is it wise to take out 50k home equity loan and use it as down payment on a new house, rent out the current house? Basically, rental income will cover the mortgage.
What are the advantage and disadvantage? (I understand every situation is different, just share your thoughts )

Thank you.

 

[TomEason]

Hello,
Here is our situation.
Our current primary home is valued at 326k (based on zillow); outstanding loan balance is 205k, 15 yrs fixed @ 2.8%. Monthly payment is 1500 + tax = 1900. We wanted to find a bigger home in a better school district. So, we tested the water by posted our house on Craigslist for rent @ 1900/month, 2 yrs contract agreement required. We received at least 10 calls within 4 hours; they're fighting to check out the house and a few were interested in a 2 yrs contract or longer. Didn't know the rental market is so HOT

Is it wise to take out 50k home equity loan and use it as down payment on a new house, rent out the current house? Basically, rental income will cover the mortgage.
What are the advantage and disadvantage? (I understand every situation is different, just share your thoughts )

Thank you.

Apparently you've priced your rent well below the market. I regularly use Craigslist for my rentals. In the past on the few occasions I've underpriced the rent, I've received many many inquiries right away. Whatever you do about buying a new house, I recommend you withdraw the rental from Craiglist, perform a rental survey (easy to do with Craigslist), then relist on Craiglist at a new higher price.

 

[Moe Bedard]

The BIG advantage is that in 15 years this home might be paid off and you can collect that $1,900 a month which could be part of your retirement income. Another advantage is tax savings on both properties. I agree with Tom on his rent analysis.

 

[Erik Sandstrom]

I'm going to put in my 2 cents here, Moe & TomEason have excellent advice by the way. In regards to purchasing a new home and pulling out equity as a down payment will depend on quite a few factors.

1. Which program suits you and your families needs the most?
2. What is your credit score?

The big question here would be the credit score. Conventional loan programs weigh more heavily on credit than FHA would. If you have a score of 659 or less in some cases it's better to go FHA because of the low down payment and low interest rates. If you have a credit score above 660 and and 10-20% down Conventional would likely be the most viable direction. If your score is above 720 the interest rate will be the same if you put 5% - 20% down. The difference would be mortgage insurance with anything less than 20% down but with Conventional you can get that extra payment removed as soon as you can provide proof of having 20% equity.

Just a thought. You're doing everything right, looking at rental prices before home shopping to know what your property will rent for. This will offset the mortgage liability and allow you to qualify for more. Be ready to provide a full year lease agreement and deposit equal to first months rent and post dated check for when the tenant will be moving in. Since you have the equity in your home we might not even need this but it's better to be pro-active than re-active.

We're always here to help, if there's a question you have about a certain program or what might be best for your situation...feel free to reach out.