October 09, 2018
A sweet little seaside cottage just went on the market and you’re now daydreaming of a weekend home. You found a fixer-upper with great potential—you could buy it and flip it. Or you’d like a new income stream as a rental property owner, and a perfect bungalow down the street was recently listed.
In any of these scenarios, since you’re not planning to leave your current home, the proceeds from its sale aren’t an option for a down payment—but that may not necessarily be a deterrent. In many cases, taking on a second property can still align with both your personal and financial goals.
To make purchasing your second home a reality, it all depends on how you finance it. And in these types of cases, many homeowners consider using their current home’s equity to buy a second property. The market is certainly favorable: In 2017, according to CNBC, homeowners with a mortgage (representing approximately 63% of all properties) saw their home equity go up by 12% at an average of $15,000 per homeowner and more than $900 billion collectively. That extra value could be tapped to go toward another down payment.
Should you use your home equity to buy a second home? Here are a few things to consider.
How Much of Your Home Equity Would You Need to Tap?
Regardless of whether you own your home outright or currently have a mortgage, you’ll want to figure out the exact amount you’ll need to take on a second property. Many homeowners will seek to borrow only enough funds to cover the down payment for the second home. But if you’re considering a fixer-upper, it may make sense to take out an amount sufficient to cover not only the down payment but also anticipated repairs and renovations.
What’s Your Risk Tolerance?
Knowing how much risk you’re comfortable taking on is key when using your current home equity to buy a second home. If your second home will be an income property (either short- or long-term rentals), do you have enough cash on hand to cover expenses during lean times of year or periods when the property is vacant? If something breaks or unforeseen damage occurs to either your primary residence or second property, do you have enough money to cover these unexpected repairs? Finally, if a financial hardship were to strike (e.g., a medical emergency or job loss), could you potentially be on the hook for foreclosure on either or both of your properties?
What Will Your Debt-to-Income Ratio Be?
Again, knowledge is power. Consult a mortgage calculator and compare your home equity lending options to know exactly what your monthly payments will be once you’ve taken on a second home. Read all fine print thoroughly and consult with your potential lenders to ensure you’re getting the most advantageous financing plan for your goals (and no hidden surprises, like fees, down the line). In addition to your monthly payments, factor in any tax implications (both obligations and benefits) that may result from purchasing a second home. If you’re not sure how your taxes will be impacted, speak to your accountant or other trusted tax professional.
Ultimately, your current finances and the specifics of your potential second property will play an equal part in determining whether becoming a homeowner twice over is feasible (and worth your while). By making clear-eyed calculations and having honest conversations with your potential lending partners, you can decide whether it makes good financial sense to take on another property.
Lead Product Designer
Follow these steps to create a plan to help you tackle things like paying off debt, opening your own business, taking a once-in-a-lifetime trip, or retiring at 65.
Whether you’re selling, refinancing, or trying to eliminate PMI on your home, you may need a home appraisal. Learn how to estimate your home’s value today.
Looking to accelerate your small business’ growth? There are several ways you can access cash to fund your business, but before you choose one, weigh the risks and rewards as they apply to your personal and professional situation.