How to Buy a Second Home Without Selling the First

If you've been a homeowner for several years, it's likely that you've built equity through appreciation and mortgage payments. This means you could potentially purchase a second home without having to sell your primary residence. How to buy a second home without selling the first. Most homeowners who typically sell their current property to fund a new purchase. However, not many know there are different ways of buying a second house. What I mean is, you can buy another home, use the equity and still keep your primary residence.

If you’ve been a homeowner for several years, it’s likely that you’ve built equity through appreciation and mortgage payments. Most traditional homeowners believe they have to sell their current property to fund a new purchase. That isn’t always the case.

There are ways to purchase a second home without having to sell your primary residence, even if you don’t have a boatload of savings!

In this article, I will go over ways to buy a second home without selling the first. If you’re short on time you may want to watch my you tube video that summarizes this article. 

Maybe you’re interested in purchasing a vacation home. Or Perhaps your home was listed for sale but didn’t sell. 

 

Or just maybe… you want to invest in real estate. 

 

Regardless,  there are options to buy a second home without selling the first!

Advantages of Keeping Your Primary Residence

As I’ve assisted clients in purchasing second homes using these methods, I’ve witnessed firsthand the wealth-building and tax-saving opportunities owning real estate can offer.

 

 

Surprisingly, many people don’t know that these strategies exist and often assume that the only way to have enough cash to buy a second property is to sell their current home.

Little do they realize they can tap into the existing equity in their current home without having to sell!

 

 

It’s important to emphasize that before proceeding with any of these strategies, I recommend you consult with your lender and a financial advisor. Their expertise and guidance will ensure that you make well-informed decisions tailored to your specific financial situation.

 

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If you've been a homeowner for several years, it's likely that you've built substantial equity in your property through appreciation and mortgage payments. In this article we'll discuss how to buy a second home without selling the first.

How to Buy a Second Home without Selling the first

In this article, I’ll share three ways (and an additional bonus 4th way!) to tap into your home equity strategically and purchase a second home without selling your first.

Strategy #1. Open a Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit (HELOC) is a great way to tap into your home’s equity. With a HELOC you’re essentially using your equity as a credit card. This revolving credit line allows you to withdraw funds as needed. It’s an ideal choice for financing your second home or investment property. 

 

You can make a “cash” offer on a home if you’re paying it with a HELOC. (Now you know one of the ways investors win bidding wars). A cash offer is much more attractive, especially in a seller’s market.

If you’re HELOC isn’t enough to cover the entire purchase price, you can use funds from a HELOC for the down payment.

How a HELOC Works when buying a second home

Just like a regular loan or credit card, a HELOC is a line of credit with fixed or variable interest rates backed by your primary residence. 

Common Interest Rates on a HELOC
  • Variable Rates: HELOCs usually come with fixed or variable interest rates. Fixed rates offer peace of mind but may be higher, while variable rates can be lower but fluctuate often. The choice depends on your preference and your risk tolerance. 
  • Introductory Rates: Some lenders may offer lower interest rates during the initial period of the HELOC. Just be aware that the rates are temporary and will eventually adjust to the regular variable rate. 
  • Interest Only:  Some HELOCs are also available with interest-only payments. For example, if you need more cash on hand for renovations and want to keep your monthly obligations lower;  you may opt for an interest-only HELOC temporarily then pay towards the principal or refinance later on. It is up to you to decide which HELOC option is best for you depending on your goals.
Fees Associated with a HELOC
  • Upfront Fees: HELOCs may come with upfront fees, including application fees, origination fees, and appraisal costs. It’s important to shop around and understand all the fees involved and factor them into your decision-making process. In my experience, local credit unions have the lowest fees on HELOCs. 
  • Closing Costs: Depending on your location, you might also encounter closing costs when setting up a HELOC. Be sure to ask your lender about these costs and consider them in your financial planning. Again, shop around until you find one that has low or no closing costs. They’re out there!
Risks Associated with a HELOC
  • Committing to a Another Monthly Payment: If you are unable to make the payments for your HELOC, you could face foreclosure, just like you would with a traditional mortgage. And your primary residence could be at risk. HELOCS are best used as a short-term strategy with the goal of refinancing into a fixed mortgage loan as soon as you can- and paying off the HELOC. 
  • Changing Market Conditions: Since HELOCs are linked to market conditions, an economic downturn or a drop in property values can affect the credit limit or interest rates, potentially leading to financial challenges.
Debt Management
  • Overspending: HELOCs provide access to a significant amount of credit and it can be tempting to overspend. Good financial discipline is crucial to managing that money. Buying cars or vacations using your HELOC is not wise. But buying an appreciating asset such as a second property, or buying a new place to live while keeping your current house as a rental are great ways to use a HELOC!
Before Considering a HELOC

Before considering a HELOC, you should assess your financial situation, needs, and ability to manage debt responsibly. Seeking advice from a financial advisor or a trusted real estate agent can be valuable in making an informed decision that aligns with your long-term financial and real estate goals. Additionally, understanding the terms and conditions of the HELOC agreement, including interest rate adjustments and repayment requirements, is important to ensure a smooth experience.

Strategy #2. Cash-Out Refinancing

Cash-out refi is a powerful tool to unlock the potential of your home’s equity. This one is done by refinancing your existing mortgage at a higher amount than you owe, then getting the difference in cash. You can use this infusion of funds to pursue your real estate ventures, and start an investment portfolio that aligns with your goals. A cash-out refi is different from a HELOC in that you actually have to refinance your primary mortgage loan with a new one. The amount of the refinanced mortgage is higher than the current outstanding balance. The difference between the two amounts is then given to you in cash! (cha-ching!). You can then use this cash to finance a second home or investment property.

 

How a Cash-Out Refinance Works when buying a second home

  • Loan Application: To begin a cash-out refi, you would apply for a new mortgage loan because you’ll essentially be paying your house off with another, higher loan and pocketing the difference.
  • Property Appraisal: Your lender will typically require a property appraisal to determine the home’s current market value, which is used to calculate the amount of available equity.
  • Loan Approval: If you meet the lender’s criteria, you’d be approved for the new mortgage and the lender would determine the amount of cash to approve. 
  • Receiving Funds: Once the refinance is completed, you would receive the cash often in one lump sum which you can use to put towards your next house.

Key Considerations when doing a cash out refi

  • Closing Costs: Similar to a regular mortgage, cash-out refis may involve closing costs, appraisal fees, and title insurance.
  • Interest Rates: Because you’re getting a brand new loan you will be subject to the current interest rates and not the rates you had when you first bought your property. It’s important you know the terms of the new mortgage and be okay with the new monthly payment.
  • Loan-to-Value (LTV) Ratio: Lenders often have maximum LTV limits, which determine the amount of equity you can access through cash-out refinancing.
  • Risk: Increasing the mortgage amount means higher monthly payments and potentially extending the loan term. It’s crucial to assess long-term affordability and financial goals.

Strategy #3. Home Equity Loan: A Fixed rate Option

A home equity loan, also known as a second home mortgage, is a fixed-rate loan that allows you to borrow against your home equity. Unlike a HELOC, which provides a revolving line of credit, a home equity loan provides a lump sum upfront, which is repaid over a set term with regular monthly payments. This is also different from a cash out refi in that your first mortgage stays intact. You’re getting a second mortgage with its own payment. You can then use that cash as down payment for your second home and keep your primary residence!

How a Home Equity Loan Works when buying a second home

  • Application and Approval: You would apply for a home equity loan and, if approved, receive the loan amount as a lump sum.
  • Fixed Interest Rate: Home equity loans typically come with a fixed interest rate, offering predictability and stability in monthly payments.
  • Repayment Schedule: Borrowers repay the loan over the agreed-upon term, usually with a fixed monthly payment.
  • Second Lien: A home equity loan becomes a second lien on the property, meaning it is secondary to the primary mortgage in case of default. 
  • Key Considerations for Home Equity Loans:

Key Considerations when doing a home equity loan

  • Closing Costs: As with any loan, you should be aware of any closing costs associated with the home equity loans.
  • Debt Management: You should carefully consider your ability to manage additional debt and ensure you can afford the monthly mortgage payments as well as the payment for your second home.
  • Risk of Foreclosure: Just like with a HELOC, defaulting on a home equity loan could result in foreclosure. Remember, your primary home is used as collateral. 

Strategy #4. (Bonus!) Exploring the Potential of DSCR Loans for Investors when buying a second home as an investment property

DSCR stands for Debt Service Coverage Ratio. DSCR loans are specialized financing options primarily used for purchasing or refinancing investment properties. Unlike traditional mortgages, DSCR loans focus on the property’s income-generating potential rather than relying solely on your personal income and credit. Unlike FHA loans and VA loans, lenders qualify the property’s ability to generate sufficient rental income to cover the loan payments, providing a more objective approach to loan qualification. In short-this loan qualifies the property, not you!

 

 

DSCR loans are a great option if you’d like to use your second home as a short-term rental, as the approval of the loan is dependent on the property’s cash flow. This strategy allows you to diversify your investment portfolio while leveraging your home equity for a profitable venture. Consult with a mortgage broker to determine if DSCR loans align with your investment goals. I’m happy to give you a referral if that would be helpful. Just send me a message.

How a DSCR loan works when buying a second home as an investment property

This strategy works well when buying a second home without selling your first. It’s especially useful when used in conjunction with a HELOC to assist with your downpayment. It’s a long-term mortgage loan specifically for income-producing  properties. 

  • Income Evaluation: Lenders assess the property’s potential rental income based on current market conditions and rental rates for similar properties in the area.
  • Debt Service Coverage Ratio: The DSCR is a crucial metric lenders use to determine loan eligibility. Lenders calculate this ratio by dividing the property’s net operating income (NOI) by the property’s debt service (loan payments).
  • Ideal DSCR Ratio: Lenders typically look for a DSCR ratio above 1.0 to ensure that the property generates enough income to cover its debt comfortably. The higher the DSCR, the more appealing the investment property is to lenders!
  • Loan Approval: If the property’s projected rental income demonstrates sufficient coverage of loan payments, that is good news as you are more likely to secure approval for the DSCR loan.
Key Considerations of a DSCR Loan
  • Property Evaluation: The condition and potential rental income of the investment property play a significant role in determining loan approval and terms.
  • Limited Personal Qualification: Unlike traditional mortgages, DSCR loans place less emphasis on your personal credit score and income. Instead, the property’s financials are what matter.
  • Higher Down Payment: DSCR loans may require a larger down payment compared to conventional mortgages to mitigate potential risks for lenders.
  • Interest Rates: Interest rates for DSCR loans may be higher than standard mortgage rates, as they are tailored to the investment property’s risk profile and income potential.
  • Financial Planning: You should have a solid financial plan for managing the property, considering factors like vacancies, maintenance costs, and potential fluctuations in rental income.
Benefits and Risks of a DSCR loan
  • Access to Investment Properties: DSCR loans enable you to purchase or refinance income-generating properties you might not qualify for with traditional mortgages.
  • Objective Approach: DSCR loans focus on the property’s financial viability, making it easier for you to buy more rental properties and build up your real estate portfolio in the future.
  • Market Volatility: Fluctuations in the rental market or unforeseen vacancies can impact the property’s rental income, potentially affecting the DSCR ratio.
  • Property Management: You must be prepared for the responsibilities of property management or work with reliable property management services to maintain the property’s income stream.
If you've been a homeowner for several years, it's likely that you've built substantial equity in your property through appreciation and mortgage payments. In this article we'll discuss how to buy a second home without selling the first.

Next Steps for buying a second home without selling the first

Tapping into your home equity strategically can unlock exciting opportunities for purchasing a second home or investment property without selling your current home. 

 

To further assist you in your journey, I have compiled a list of banks and credit unions that offer HELOCs and other home equity loan options. Additionally, I have included a specific list tailored for those residing in Utah. To get this exclusive list, simply click the link below to download it

 

If you decide to explore real estate opportunities in Utah, I’d be thrilled to offer my services and guide you every step of the way.

 

If your real estate needs take you elsewhere, I am more than happy to refer you to a trustworthy agent in your desired location! Just email me and I’d be happy to help!

Remember, the key to successful real estate endeavors lies in leveraging your home equity wisely. By combining these proven strategies with professional guidance, you can turn your dreams of owning a second property into a rewarding reality. Feel free to reach out with any questions!  I’m here to help you achieve your real estate goals!

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