Is using your Home Equity to Purchase a Second Home an Option to purchase your home in the La Quinta, Indian Wells, Palm Desert, and Rancho Mirage area? With current interest rates higher than they have been for many years and the increase of home prices over the same time, you may have built up quite a bit of equity in your home – and missed out on purchasing anything else.
Should you use the equity in your home to purchase a second/vacation home?
One of the major downsides of using your primary home to purchase your vacation home is now collateral to secure the loan on your vacation home. If something happens and you cannot make the payments on your vacation home, your lender could foreclose on your primary residence. You could find yourself evicted.
If you have paid down most of your primary residence mortgage, the added financial burden of your vacation home could be quite overwhelming.
Even if you opt for a home equity loan, it’s for the purchase of a second home. So, you may still have to pay closing costs if the lender even agrees to your home equity loan.
A HELOC (Home Equity Line of Credit) may be a better option.
Investopedia says, “Home equity loans and home equity lines of credit (HELOCs) are loans secured by a borrower’s home. A borrower can take out an equity loan or credit line if they have equity in their home. Equity is the difference between what is owed on the mortgage loan and the home’s current market value. In other words, if a borrower has paid down their mortgage loan to the point that the home’s value exceeds the outstanding loan balance, the borrower can borrow a percentage of that difference or equity, generally up to 85% of a borrower’s equity.
Because both home equity loans and HELOCs use your home as collateral, they usually have much better interest terms than personal loans, credit cards, and other unsecured debt. This makes both options extremely attractive. However, consumers should be cautious of utilizing either. Racking up credit card debt can cost you thousands in interest if you can’t pay it off, but becoming unable to pay off your HELOC or home equity loan can result in losing your home.” (Investopedia)
Home equity loans give the borrower a lump sum upfront; in return, they must make fixed payments over the life of the loan. Home equity loans also have fixed interest rates. Conversely, HELOCs allow borrowers to tap into their equity as needed up to a specific preset credit limit. HELOCs have a variable interest rate, and the payments are not usually fixed. (Investopedia)
https://www.investopedia.com/mortgage/heloc/home-equity-vs-heloc/
Adjustable Rate Mortgages or Cash?
However, if you’re unsure about using the equity of your primary home to purchase a second home, you may want to secure an Adjustable Rate Mortgage (ARM) or pay cash.
As per an earlier post by Dean Rathbun, United American Mortgage Corporation, an ARM (Adjustable-Rate Mortgage) can be fixed for a duration of time. The most common ARM’s are 5, 7 and 10 year ARM’s. That means the loan is still amortized over thirty years but is a fixed rate of interest for the initial term of 5, 7 or 10 years. These products are often offered at a substantially lower rate than fixed rate mortgages. For example, as of this writing a 30-year loan is hovering about 5%, whereas our 7-year ARM is around 3.625%. That is quite a discount and can truly lower the monthly payment. On a 7- or 10-year ARM you also qualify at the start rate which can help people qualify.
Using an Adjustable Rate Mortgage, borrowers can buy a great property at a stable price, with the ability to refinance rates when they come down as projected in 2024. By taking this action, borrowers can buy a home they love and have confidence that the payment in the future will lower as rates fall. Most of our clients are currently closing their loans with 7-year and 10-year arms, which are fixed for the initial duration, amortized over 30 years. This gives them the confidence of a fixed rate for a prolonged period, with a lower interest rate than a fully amortizing 30-year fixed rate. A safe and more affordable way to finance.
You can still purchase a home in the La Quinta, Indian Wells, Palm Desert, and Rancho Mirage area, but you will want someone in your corner who has been through real estate markets like this before. As a seasoned real estate professional, I will be able to help you purchase your home this fall.