Over the past year, Tulsa home prices saw a steady climb. You may have even made some improvements to increase your home’s value (and, thus, your equity) since you bought it. Many sellers in today’s Tulsa real estate market cash in their equity to buy a new home. Others contemplate using their home equity to purchase a second or investment home while continuing to own and reside in their current property. In terms of growing your wealth over time, using your equity for an investment property might be a smart move. But that is not always the case.
The Pros & Cons of Using Home Equity to Buy a Second House
Pros
When using your home’s equity to buy a second property, it helps to determine how you plan on using that second property. Will it be a vacation home for personal use? Or do you plan on investing in a rental property? Between the two, the best use for your equity would be putting it into an investment property. A home equity loan gives you a chunk of money to put down on that second home. This may help you look better to a seller. Also, you get to use your primary residence as collateral. This helps a little when it comes to interest rates. Plus, when do end up renting out the investment property, that money helps pay for your mortgage, insurance, taxes, etc. In turn, this allows you to create a nice investment portfolio and build your wealth.
Cons
With the pros, come the cons. Currently, your home’s equity is considered an asset. But, once you use it to buy another property, you are turning it into a debt. While home values rose significantly over the past couple of years, that trend may not always be the case. (Remember the “bubble bursting” back in the late 2000s?) When you purchase a second property, you are now responsible for two properties. That means two property taxes, two insurance premiums, and (sometimes) two mortgages. When your investment property remains vacant, you still need to pay for it all. Defaulting on your second property could mean losing both properties since you use your first home as collateral for the second one. When using your equity to secure a second mortgage, you actually end up paying for three mortgages (the one on your first home, the one on the second home, and the one for the home equity loan).
Yes, using your equity to purchase an investment property could be a great idea. But it comes with potential downfalls as well. So, you must weigh both the pros and the cons when making your decision about what to do with your equity. Talk to your lender first. Then, contact me when you want to start looking for another Tulsa home.
Lori Cain, REALTOR®, Serving Midtown and the greater Tulsa, OK area. Call 918-852-5036.
[…] own a home now and its value rose quite a bit since you bought it. So, you decided that you want to cash in your equity and buy a new home. Think about this for a moment. Instead of looking at buying a new home for yourself, renting your […]