How can I use the equity in my house to buy another house?

February 25, 2018 2:55 PM

I want to buy and move into a new house, and then sell the one I live in now. I own my current home outright (no mortgage). It's worth about $170,000. I'm looking to buy something that costs roughly twice as much, but I only have enough cash for a 10% down payment. What are my options for using the equity in my current home to contribute to a down payment on the next one?

To clarify, I'm not interested in selling where I live now first. For a variety of reasons I need to buy first, and sell second. And I do think my current home will sell quickly, in a matter of days or weeks.

Thanks!

posted by something something to Work & Money (11 answers total)

We did a cash-out refi. It was basically like a home equity loan without the floating rate. Worked great for us.
posted by jeszac at 3:05 PM on February 25, 2018 [1 favorite]

We did buy-first, sell-second twice. The first time, we just put down the 10% and paid down the mortgage to 80% fairly quickly after the first house sold. We were assured that taking the PMI off would be no problem, but it was, and we had to pay to refinance instead. The second time (in the last year), we paid a 10% downpayment and a second HELOC on the NEW house to get to the 20% down payment. It was interest-only with a pretty small payment. When the old house sold (within a couple of weeks, plus a month to close), we paid off the HELOC completely plus some onto the principal of the loan. It was worth the crossover to have the cash flexibility and we ran the numbers with the mortgage officer to be sure we weren't overpaying on the main mortgage given the lower down payment.

The reason you don't want a HELOC or refi loan on the original house is that then it becomes a liability that will affect the affordability calculation and the mortgage on the new house. The lender will make you sign something stating your intention to sell the house and get rid of this liability as soon as possible (we had mortgages on both the houses we sold, but could afford to carry both loans). I would think if you own the house outright they will not be nearly as concerned about this. In addition, if you get the HELOC or cash out refi on the old house, you'll have to pay for an appraisal on the old house plus pay all the transaction costs related to that loan. If you do an 80/10/10 like I described, they'll be able to roll most of the costs of the 10% loan into the main mortgage and you can do just one appraisal.

All of this assumes you can afford the payments and can get a loan on the house with just 10% down and are mostly looking to avoid PMI and get your loan balance down using your equity. A good loan officer should be able to work with you on a bunch of scenarios and financing options. There will be different interest rates and fees associated with any of the options.

Good luck! If the numbers work out, it's so worth it. I wouldn't do it any other way unless I absolutely had to.
posted by pekala at 3:20 PM on February 25, 2018 [7 favorites]

Building on what pekala said, loan fees are up front moneys that you pay, loan costs are what the lender pays but you don't see. So even though from your perspective it may not make a difference, it may to the lender (and so they may be more willing to work with you in a scenario that benefits them).
posted by forthright at 3:32 PM on February 25, 2018

Seconding the idea of putting 10% down and getting a HELOC on the new place for another 10% and a mortgage for 80%. The key phrase you want is “loan to value” or LTV. You need to make sure your mortgage and HELOC provider for the new place will accept a LTV of 90% (meaning you have loans for all but 10%). I did this and it worked well. I got 80% from PenFed and 10% from a university credit union.
posted by Mid at 6:19 PM on February 25, 2018 [1 favorite]

Oh yeah - no PMI if you do the 80/10/10 method.
posted by Mid at 6:49 PM on February 25, 2018

As pekala said, a HELOC is a liability, even if you don't borrow against. Meaning if you have $100k HELOC but never borrow that money, your credit report will show $100k as debt. This is slightly counter intuitive since unused revolving credit lines are not usually counted against you. That said, that's exactly what we did.. used a HELOC as a bridge loan for down payment to buy a 2nd property first, then sold the 1st property after. We also owned the 1st property outright and the lender did not make us sign any extra documents stating an intent to sell.

We had one lender tell us this was illegal (she is wrong) and another lender set us up with both HELOC and new mortgage. I also know a person who was turned down for a HELOC because they wanted to use it as a bridge loan. YMMV
posted by Pig Tail Orchestra at 6:19 AM on February 26, 2018

Response by poster: We had one lender tell us this was illegal (she is wrong) and another lender set us up with both HELOC and new mortgage. I also know a person who was turned down for a HELOC because they wanted to use it as a bridge loan.

This is my concern. My realtor said we shouldn't tell the bank we want the HELOC to use as a down payment on a house, because in order to get a HELOC you can't be intending to sell the house you're drawing equity from. "It could be considered fraud, but it really isn't!" But it seems like it might be.

Thank you for all the responses so far. We're going to meet with a mortgage broker, I guess, and I'll bring up these options.
posted by something something at 6:40 AM on February 26, 2018

Borrowing money against your current house to buy a new one makes no sense whatsoever. Talk to the mortgage broker. All that matters is that you have the cash flow to afford to make payments on the house you want to buy, and the good credit to be able to borrow money. Down payment is secondary to that, really - you can do a low down payment loan, even if it has PMI, and then pay it down below the threshold to remove the PMI once you sell.

I have bought a house while owning two other houses, and carrying two other mortgages -- and I only make $60K per year. I had to do a portfolio loan until one of them sold because my debt-to-income ratio was too high but really, if you have the cash flow and your credit is not horrible, you are overthinking this. The current house is a red herring. You can sell it after you move and end up with better cash flow and savings but as long as you can afford to buy the new house that's all that matters.
posted by rabbitrabbit at 8:40 AM on February 26, 2018 [1 favorite]

Response by poster: Sorry for the thread-sitting - we are in an extremely tight market and whatever we want to buy will have multiple offers. It's for this reason we want to have the full 20% available as a down payment, to make us as attractive as possible to sellers. The first time I bought a house I only had 5% down and it was fine - but the market in my area was much different at that time.
posted by something something at 8:54 AM on February 26, 2018

| Borrowing money against your current house to buy a new one makes no sense whatsoever.

Except it makes perfect sense. For the $50* I paid to open a HELOC (and a ding to my credit report?), and one month only interest-only payment of 1% of the balance ($600??), I was able to move one time, directly from my old house in to my new house with no fuss, and not have to make 2 mortgage payments**. Additionally the HELOC was used to prep the old house for selling.

*Granted I had access to a low-cost HELOC.
**I'm lying here to make the point, since the first house was lien-free.
posted by Pig Tail Orchestra at 9:54 AM on March 2, 2018

| My realtor said we shouldn't tell the bank we want the HELOC to use as a down payment on a house

IANAL but I know for certain this is not illegal. I got both the HELOC and new mortgage from the same TBtFBank, both originated by the same loan officer (they when thru different loan processors of course). I can't speak to whether the 2 loan processors knew I was doing this, but again, it was initiated by the same broker. My friend's experience being turned down seemed to be related to not keeping the HELOC open, but again, my long-term loan is from TBtFBank and they won't be selling it anytime soon.
posted by Pig Tail Orchestra at 10:05 AM on March 2, 2018