What is the best choice for getting money out of my equity in my current home to purchase a second home?
February 13, 2009 by Debt Equity Financing
Filed under More Equity Answers
Can you answer sholly13’s question about Equity?:
I have $70,000 of equity in my current home I need anywhere from $20,000 to $25,000 for the purchase of a second home. Should I refinance or take out an equity loan?
Mortgage Refinance Rates
I have $70,000 of equity in my current home I need anywhere from $20,000 to $25,000 for the purchase of a second home. Should I refinance or take out an equity loan?
Mortgage Refinance Rates
Depends on the terms of each. What you’re asking is the equivalent of “should I buy a Chevy or a Ford” without telling us what features each has.
I would just refinance, most of the time you can lower your rate, and take out money which means that your monthly payment wont go up by much. Equity Loans are nice though becuase you can most often wright it off, but then you are stuck with an additional monthly payment. I would look at your current rate and the current mortgage rates and consider refinancing first. Try going through a Credit Union also, they have deeper pockets which means better rates. Best of Luck!
I would refinance with the stated intention of buying a second home and state why I was buying the second home. I would also put up the second home for collateral in the case I broke my leg and could not would for a month or some other reason that kept me from temporarily paying the loan back. This way I don’t risk losing my primary dwelling.
Are you moving? Will the second home be a summer home?
Will it be a rental property?
Banks and realtors will want answers to these questions because the last thing a bank wants is to through you out of your primary dwelling because you could not pay the loan.
They would rather seize the second home as collateral if you could not repay the loan for a short period.
The easiest and cheapest way to do it is to get a Home Equity Line of Credit (HELOC). Any bank will do it and it costs almost nothing. You can borrow on the HELOC when you need money and pay it back in small payments or in big chunks, as you are able.
If you have a great rate on your first mortgage, then you should think hard about refinancing as you will lose it. Depending on what you expect to gain from the investment property it still might make sense. You need to run the numbers using both options.
The disadvantage of the home equity loan is that it will be most likely tied into the prime, which although has recently dropped, is subject to change monthly.
If you plan to keep the investment property for more than a year or two, the refi is overall the least expensive way to go.
A home equity loan, being your second mortgage, will be more expensive than your existing mortgage because the second mortgage lender is exposed to a greater risk.
Refinancing your first mortgage is the preferred option. Better still, refinance it with your existing mortgage lender. You may be able to negotiate a good interest rate. Also, you’ll avoid upfront cost that may come to a couple of thousand dollars.
For the tactics you can employ to negotiate with your existing mortgage lender, read this article: