Have you been thinking of buying another home? Are you wondering whether you can use the equity in your current home for your next downpayment?
Good news, you can! Here are three ways to access your equity.
NUMBER ONE: HELOC
First, let’s define HELOC. It stands for “home equity line of credit.” It is exactly what it sounds like, a line of credit, similar to a credit card. The amount of credit you’ll be issued is based on the equity you have.
Let’s Weigh Some Pros and Cons
The major benefit to using a HELOC is that it’s uncomplicated. Simply get approved for the credit line and use it.
One of the drawbacks for this option is that it creates additional DEBT for you. The amount of credit you use becomes a lien against the title of your home. It has to be paid off.
There Are Also Income Requirements to Consider
Moreover, it’s important to note that HELOCs only work if you have BOTH enough equity in the home to pull a line of credit, AND enough income to show you can carry the 3 loans you’re creating which are:
- current mortgage
- HELOC
- new mortgage
NUMBER 2: CASH OUT REFINANCE
In this scenario, you are increasing the loan amount in your current home in order to get cash.
Here’s How It Works
Let’s say you currently have a loan of $300,000 and you need $200,000 for a downpayment on your next home. You can request that your lender increase your loan amount from $300,000 to $500,000 and hand you the difference of $200,000 in cash.
Let’s Weigh Some Pros and Cons
There are two major benefits of using a cash out refinance. One is that you get to keep your home, if that’s important to you. The other, is that you are likely to pay a lower interest rate on a refinance than you would on a HELOC.
On the other hand, you are increasing the monthly mortgage on your current home PLUS taking on a new mortgage for the purchase of your second home, effectively increasing your overall debt.
Take Note of Overall Debt and Current Interest Rates
While cash out refinance is a great option, it is wise to take a bird’s eye view of how this changes your overall debt. For one, make sure you have enough equity to borrow against. Secondly, you should be able to comfortably carry the increased mortgage on current home and the new mortgage on second home.
Lastly, it’s worth noting that in 2023 interest rates are higher than they’ve been in the past couple of years. By refinancing, you are buying into today’s rates. If you were able to lock at the historically low rates of two and three percent, refinancing may lose some of it’s appeal.
NUMBER 3: SELL
In this scenario you get cash from the sale of your current home in order to buy the next home.
Let’s Weigh Some Pros and Cons
Most significantly, selling is the only option that frees up actual liquid cash WITHOUT creating more debt for you.
However, it does take a little more planning to execute a sale and purchase transaction than it would to use a HELOC or a cash out refinance.
Number One Myth
There is a big misconception that you have to sell FIRST and then buy. Naturally, this causes anxiety. Where will you live in between? What if you don’t find the next home?
The fact is, you CAN buy before you sell. Some of your options are:
- Contingent sale
- Bridge loan
- Specialized programs that allow you to buy first and sell after
At Melissa Urena & Associates, we specialize in taking you from first home to forever home. If you’re ready to upgrade to your next residence and would like to lear more about the programs that allow you to buy before you sell, schedule your free consultation to find out if you qualify.
