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Dear MarketWatch,
I bought a house in my home state seven years ago. I purchased the home using an FHA loan and down payment assistance. Several years ago, I moved out-of-state and I have kept the home as an income property. It was and always has been my intention to keep this home permanently and have it as part of my retirement plan (hopefully along with a couple of others in the future). I have a lot of equity in the home, as the value of the home has surged since I purchased (it’s now worth about double what I owe on it).
I’m writing to you because I’m wondering if it is a good option for me to take equity out on the home to use towards a down payment on my next home. My credit is around 750, I have no debt other than this mortgage and a small car payment that will be paid off in a year.
However, my savings are in a sad state. Two out-of-state moves in the last several years, the loss of a job (and subsequent pay cut as a result), and some other personal medical expenses have given that account a real beating. I am currently renting and I would love to purchase my next home as I see that as another long-term investment in not only my financial well-being, but my mental/emotional as well.
I have kept the same renter in the home since I moved out, and the property cash flows nicely. The mortgage currently has a 4.75% rate, and the down payment assistance received was $7,500. If I take equity out, I would have to pay that back (understandably), so that is something to consider as well. I earn a decent living and have a side hustle to help expedite my savings. That being said, in this day in age, it can still take quite a while to save 20% down payment.
Can you offer any advice?
Thank you,
House Hungry
Dear Hungry,
First and foremost, I want to commend you on emerging from such a difficult series of setbacks in what sounds to be fairly strong financial shape. You clearly see the value in building an emergency fund for that rare rainy day, week or month.
Which is why my next bit of advice might come as a disappointment to you: I think it’s in your best interest to hold off on buying a home for the time being. And before you tune me out — I get it, no one likes to be told no — I think you should re-consider all that you’ve just been through.
You managed to emerge from job loss, multiple moves and medical emergencies without debt because you did what so many Americans either don’t or can’t do: You saved your money. Building back those savings should be your goal for the time being.
Here’s why: Let’s say you were to cash out equity in your investment property — either through a refinance of a home equity line of credit — and then the bottom falls out again. From what you’ve told me, you don’t have much in the way of savings in your personal accounts. If you’ve used all of the equity you cashed out from your investment property for the down payment on your new home, you won’t have that as a resource to fall back on.
Imagine what would happen next. You could fall behind on one or both of your mortgages, depending on how much money you make through your rental income. That would threaten your housing, your credit and your emotional wellbeing. Perhaps you’d be forced to sell your first home — but then, you’d be missing out on the financial opportunities for your retirement.
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Cash-out refinances and HELOCs are not only harder to get for investment properties, but also more expensive.
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This isn’t to say you shouldn’t ever cash out some equity from that first home to buy a second one. Though, keep in mind, cash-out refinances and HELOCs are not only harder to get for investment properties, but also more expensive. You’ll be charged a higher interest than you’d get for a home you plan to live in, and they can come with steep fees.
You’re also assuming that owning a home is the better financial move. It might be, but that’s not a given. Sure, when you own a home, you’re reaping the long-term benefits thanks to the growing value of that investment, to say nothing of the ancillary benefits that come from not having a landlord. But you’re also responsible for a host of other expenses, as I’m sure you’re aware, which offset some of these benefits. In many parts of the country, renting and investing your savings in other vehicles such as stocks or mutual funds can offer a much better financial return than owning a home.
Take some time to rebuild your savings. You don’t necessarily need the equivalent of a 20% down payment saved up, but at least enough to cover three to six months of your expenses in a worst-case scenario. At that point, do the math to make sure that homeownership is the best financial route for you to take. If it is, consult with a financial adviser or a loan officer to determine your best course of action for refinancing your investment property’s mortgage and taking out a new one — a lender might be willing to score you a deal.
Good luck with this journey — based on how you’ve fared thus far, I have every confidence that you’ll come out stronger on the other side of this.
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at TheBigMove@marketwatch.com.
