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Category Archives: Buying and Selling

What Is A Hybrid Loan and How It Works

I’ll be the first to admit the real estate and mortgage industries have their very own special word salad. Various terms and words can have different meanings based upon context and the mortgage industry is no different. Enter the term ‘hybrid.’ Yes, it’s alive and well in the industry but for some it can be confusing as it relates to getting a home loan.

I’ll be the first to admit the real estate and mortgage industries have their very own special word salad. Various terms and words can have different meanings based upon context and the mortgage industry is no different. Enter the term ‘hybrid.’ Yes, it’s alive and well in the industry but for some it can be confusing as it relates to getting a home loan.

What’s a hybrid? A hybrid is a combination of one or more characteristics combined into one new entity. Automobiles have hybrids. So does food and agriculture. Pretty much any industry can boast some form of a hybrid. In the mortgage industry, hybrids also abound.

We’ve said before here in this very column that home loan terms fall into two distinct categories: fixed and adjustable. A loan is either fixed, where the interest rate never changes throughout the life of the loan. An adjustable loan is one where the monthly payment can adjust based upon previously established terms. An adjustable rate mortgage, or ARM, doesn’t change ‘willy nilly.’

There are some rules an ARM must follow. Specifically, paying attention to the basic index in which the ARM is tied.
Then there’s the margin.  The margin dictates how much the new rate can become adjustment time. And finally there are rate caps which limit how much the rate can change when it’s due for an adjustment. But we didn’t mention hybrids, did we? So if hybrids are a ‘thing’ where do they fall in the mortgage biz?

A hybrid at its very base is indeed an ARM. So why the hybrid tag? Hybrids used to be a very attractive option when rates were at relative highs. A hybrid starts out at a slightly lower rate compared to similar ARMs.

It’s called a hybrid because there is an initial period where the loan is fixed for a predetermined period. A 5/1 hybrid means the rate is fixed initially for five years and the one indicates when the adjustment can take place after the initial five year period. In this example, the rate may change, after five years, once per year. Most such loans also employ caps when limiting how much the rate can change after the five year period at each adjustment.

So why do some choose a hybrid? The initial rate will be lower compared to current market fixed rates. Further, many may know they’re likely to move before the five year term is up. Personally, I prefer the stability of a fixed. But hybrids can work well in specific, niche circumstances.

Position Realty
Office: 480-213-5251

Ten Mistakes That Will Keep Your Home From Selling


When you’re selling your home, you need every advantage you can get. And there are few homes that are magically market ready without a little help. If your home needs a touch more than a little help, it’s time to get focused. After all, listing your home when it’s not in the right condition to sell will probably only end in frustration. And, in this case, frustration means: your home sitting on the market for months with no offers or the errant, offensive, lowball.

If you want to make sure you get home sold quickly and for the right price, you’ll want to avoid listing it with the following:

1. Excessive damage

Maybe the home you’re selling was used as a rental and trashed by frat boy tenants, or maybe you just haven’t kept it up as you should. Either way, those holes in the wall that look like the living room was used as a boxing gym, the scratched-up wood floors on which dinosaurs have clearly been racing, and the yard that’s barren except for those two-foot-tall patches of weeds are not what buyers are looking for. Unless you’re planning to offer your house for a price that will make buyers emphasize the good and ignore the bad and the ugly, it’s going to need some attention.

2. Carpet in the bathroom

It’s just gross. And everyone who walks into that bathroom is thinking one of two things: 1) There’s gotta be mold under there; 2) There’s gotta be pee on the floor around that toilet. This is one update you’ll want to do before you list. Or, if you’re already listed and your home’s not selling.

3. Big, nasty stains

A buyer shouldn’t know where your dog likes to mark or where your kids spilled the entire bowl of holiday punch. If the stains on your carpet are that bad, potential buyers will stroll in and run right back out. No one wants to buy a pigsty. Invest a few bucks in new carpet. You’ll make the money back since you won’t have to drop your sales price.

4. Pet smells

Speaking of pets…they smell. You probably don’t notice since you live with them everyday, but buyers will, and it might be enough to turn them off. Deep clean the carpets and the upholstery, invest in some air fresheners, and remove cat boxes from the house for showings. The last thing you want is a potential buyer referring to your house as “the stinky one.”

5. Loud dogs who bark every time someone approaches the home

One last word on pets. Barking happens, whether it’s your dog or one that belongs to a neighbor. But you don’t need that on the day of your open house. Offering to pay for doggie day care for a neighbor’s pooch can eliminate the issue and help create the serene setting buyers want.

6. Your dead lawn

Lack of curb appeal won’t necessarily kill a deal. In many cases, you won’t even get potential buyers to get out of the car. If the front yard is a mess, buyers will naturally think the mess continues inside.

7. A bad agent

Face it. Not all of them are winners. If your agent is: rude, uninformed, lazy, uncommunicative, belligerent, or unwilling to take your opinions into consideration, get a new one. An agent who isn’t giving their client the right type of attention probably isn’t going to get the job done.

8. Your sloppiness

Those drawers and cabinets you shoved everything into when you cleaned off your kitchen and bathroom cabinets could be a deal breaker for picky buyers. We all know buyers open stuff. They look in drawers, they open cabinets, they examine closets. If these spaces are messy and overstuffed, they may assume there’s not enough storage space.

9. Unreasonable sellers

Big problems in your house can be deal killers, but they can also be deal sealers, if you are reasonable. If your inspection uncovers plumbing, electrical, or roofing problems (or all three!) and you’re unwilling to negotiate, you can kiss that sale goodbye.

10. Bad Taste

Your poor decorating choices and failure to keep up with trends from this year – or century – may haunt you when it’s time to sell. If it’s true that many buyers have no vision—and all you have to do is watch House Hunters and observe a buyer getting hung up on a paint color to know that’s true – then you are really in for it with your crowded house full of ugly, outdated crap. A few simple updates can help it to look fresh and give buyers something to fall in love with.

Not sure where to start? Give us a call, we have a contractor who will wait to get paid for their work at closing. They don’t charge fees, interest and no catch!

Position Realty
Office: 480-213-5251

How to Handle Your Home Sale Falling Through


Selling a home can be an emotional and stressful experience. Then, finally, you find a buyer and you feel a huge sense of relief. You’re ready to pack up and move on.

What happens if your contract doesn’t actually make it to closing, however?

It’s easy to feel defeated and emotionally pretty upset, but you can bounce back.

Understand Why It Fell Through

One of the big things you need to do to move forward is get a handle on why your deal fell through. This is important so you can prevent it from happening again.

Contingencies are what protect a buyer from running into often unpleasant surprises.

A few reasons why home sales fall through include:

• A home inspector finds something that would be expensive for the buyer to repair.
• Your home appraises for less than the sale price.
• There’s an open lien on your property uncovered by a title search.
• Your buyer’s financing falls through.

Initially, if you run into one of the situations above, you’ll try to bring the contract back to life, but sometimes you just can’t.

Minimize Your Risk for the Next Time

So, that deal you were counting on can’t be revived, but you can do some things to minimize your risk going forward.

First, get a pre-listing inspection.

If there was an issue with the appraisal, you’ll need to work with your agent to get the price right.

Get title insurance for coverage if issues arise, and you should ask for a pre-approval letter with each offer, so you don’t have to worry about buyer financing falling through.

Also, be careful with buyers the next time around and watch for red flags.

Signs a buyer is going to back out can include not meeting deadlines and returning necessary paperwork, not returning calls, and making a lot of requests for contract changes.

Evaluate Your Marketing and Your Agent

If a deal falls through, it might be through no fault of your agent, but you should still re-think your marketing plan and perhaps make sure your agent really is a good fit before you go back on the market.

Maybe you make a few small updates to your home and re-do your real estate photos to give you a fresh start when you go back on the market.

Also, if you feel let down by your agent and you’ve noticed a pattern of behavior that’s less than supportive in the sale of your home, you might want to find someone else.

Sometimes changing agents and finding someone with a strong reputation of successfully selling homes in your specific area can make a world of difference.

If you bring in a new agent and a fresh set of eyes, you may discover that not only do you need to change up your marketing, but it could be time for a price change. A new agent might also be not just more aggressive in terms of pricing but also strategy. Maybe you need someone who is going to do even more to spread the word.

You also want an agent who going forward, works to have a backup offer. If your agent doesn’t rely too heavily on any one offer, it’s a good way to protect you if something falls through again.

For example, a good agent will often keep holding showings and open houses until a house has been closed on to make sure they’re ready if something goes wrong. If your current agent didn’t do that, it might be time to move on.

Don’t Be Discouraged

It’s really an emotional letdown when you think you’ve sold your home, particularly if it’s been on the market for a while.

If it does fall through, however, don’t let yourself get too discouraged.

Bounce back by evaluating what went wrong and working to make sure those are things that don’t happen again in the future.

Position Realty
Office: 480-213-5251

When Do Mortgage Points Make Sense?


Right now, mortgage rates are rising fast following several years of record lows. This leaves potential homebuyers wondering how they can beat the rates, and one option is buying mortgage points. With mortgage points, you can save money, but they don’t always make sense in every situation.

Mortgage points are a fee you, as a borrower, would pay a lender to reduce your interest rate on a home loan. You’ll hear it referred to as buying down the rate.

Each point you’re buying will cost 1% of your mortgage amount. If you’re getting a $400,000 mortgage, a point would cost $4,000.

Each point will usually lower your rate by 0.25%. One point would reduce your mortgage rate from, let’s say, 6% to 5.75% for the life of your loan.

However, there’s variation in how much every point will lower the rate. How much mortgage points can reduce your interest rate depends on the loan type and the general environment for interest rates.

You can buy more than a point, or you can buy a fraction of a point.

Your points are paid when you close, and you’ll see them listed on your loan estimate document. You receive the loan estimate document after applying for a mortgage, and you’ll also see them on your closing disclosure, which you get right before you close on your loan.

There are also mortgage origination points and fees you pay to a lender for originating, reviewing, and processing your loan. These usually cost 1% of the total mortgage.

These don’t directly reduce your interest rate. Lenders might let a borrower get a loan with no origination points, but usually, that’s in exchange for other fees or a higher interest rate.

To determine when mortgage points make sense, you have to calculate what’s known as your breakeven point. This is when borrowers can recover what they spent on prepaid interest. To calculate this, you start with what you paid for the points and divide that amount by how much money you’re saving each month with the reduced rate.

Let’s say the figure you get when calculating your breakeven point is 60 months. That means you would need to stay in your home for 60 months to recover what you spent on discount points.

If you’re buying a home you plan to stay in for a long time, then the additional costs of mortgage points to lower your interest rate can make financial sense.

If you doubt you’ll stay in your home for the long term, it’s probably not right for you.

If you don’t stay in the home for long enough, you will ultimately lose money.

At the same time, as you consider whether or not mortgage points are right for you, you should consider your down payment. You could be better off putting money towards a more significant down payment than points. If you make a larger down payment, you might be able to secure a lower interest rate. Plus, if you make a down payment of at least 20%, you can avoid the added cost of PMI.

Bigger down payments mean you’re lowering your loan-to-value ratio or the size of your mortgage in comparison to the value of your home.

The takeaway is not to assume that buying mortgage points is always the right option. You need to consider how long you will stay in the home and your breakeven point.

Seller Concessions:
In today’s market, sellers are offer large concessions to get their properties sold and as your realtor, we can help you lower your interest rate by having the seller pay for all or a portion of the rate buy-down. Give us a call today to find out how you can save thousands over the life of your loan.

Position Realty
Office: 480-213-5251

Four Things That Will Hurt Your Credit Scores


Credit scores are simply a numerical reflection of your current credit and payment patterns. Typically, the higher the score the better the credit. Building solid credit, especially at a young age, is relatively easy to do. Open up a credit account and pay it back on time. Conversely there are things that will lower your credit scores. Here are four of them.

The first and foremost is your payment patterns. Scores will drop precipitously when payments are late. Not late if your payment is due on the 15th and you pay on the 17th, but more than 30 days past the due date. That’s when scores will drop the most and the quickest. Avoiding these late pays will help scores but making payments more than 30 days past the due dates certainly will. They’ll fall even further if a payment is made more than 60 and 90 days late.

The next way your scores can falter looks at the outstanding balances compared to credit lines. If for example a credit card has a $5,000 limit and the balance is say $4,500, scores will fall and your overall credit profile will be damaged. Going over the credit line will cause scores to fall even more.  Scores will improve when the balances are kept near one-third of credit lines. For a $10,000 limit then the scores will rise if the balances are approximately $3,000-$4,000. Interestingly, keeping balances at zero won’t actually help scores. The scoring system looks at payment history and if there are no balances there won’t be any payments to observe.

A bankruptcy filing, be it Chapte 13 or 11, will of course hurt scores. Lenders can work around a bankruptcy if it can be shown the bankruptcy was out of the borrower’s control. A situation where there is a divorce and there are disputed credit accounts is perhaps one example. Another would be a death or extended illness in the family.

Finally, credit inquiries can negatively impact scores. There are two types of inquiries, a hard and a soft inquiry. A soft inquiry is when a credit card company takes a peek at your credit profile to see if they want to extend a credit offer. These have no impact as they’re not initiated by you. A hard inquiry however is a different story. A hard inquiry is a direct request by you for a new account. An isolated hard inquiry won’t hurt credit but several such inquiries within a shortened period of time will.

Position Realty
Office: 480-213-5251

Getting Help with a Down Payment


A down payment is something you’re likely going to need to get a mortgage to buy a home unless you’re using a Veterans Affairs (VA) loan. Saving up for a down payment is one of the more significant barriers for many people that prevents them from achieving homeownership.

A down payment is an initial payment you make when you buy a house. Down payments are usually calculated as a percentage of the purchase price. The amount can be as little as 3%, but conventional mortgages are generally around 20%.

The specifics of a down payment requirement depend on the type of mortgage you’re applying for, the kind of property you’re buying, and your financial situation.

If you can make a larger down payment, you might be able to get a lower interest rate or buy a more expensive house. Large down payments can also mean you’re responsible for smaller monthly mortgage payments.

Lenders require down payments because it helps reduce their risk exposure. You’re investing in the home, so if you were to stop making your mortgage payments, you’d be walking away from a lot of money. Down payments also reduce how much a lender has to give you to make the purchase.

Not everyone has a large chunk of cash sitting aside to use to buy a house, however. There are down payment assistance programs available, some of which are detailed below.

The Basics of Down Payment Assistance Programs

Down payment assistance programs usually come from state housing finance agencies. Sometimes these programs are also managed and offered by cities and counties and nonprofit organizations.

Types of assistance might include:

• Grants, which are a gift of money that doesn’t need to be repaid.

• Forgivable, zero-interest loans, which don’t have to be repaid as long as the borrower still owns the home and lives in it after whatever the period is—usually somewhere around five years.

• Deferred payment, zero-interest loans, often require no payments until the home is sold, the mortgage reaches the end of its term or the mortgage is refinanced.

• Low-interest loans are available and have to be repaid over a certain period of time. These help homeowners spread their down payment and closing costs over a more extended period rather than having to come up with the money all at once.

Who Can Access Down Payment Assistance?

Most programs offering down payment assistance are geared toward first-time buyers, but not all.

Even if you’ve already owned a home and a program says it’s for first-time buyers, often the program will define a first-time buyer as someone who hasn’t owned a home in the past three years.

There are also programs for specific demographics, like teachers or first responders.

Most down payment assistance programs will require that you complete specific steps, which vary depending on the program itself. For example, you might have to meet income limits or take a homebuyer education course. You could be required to buy in a particular location or stay below a certain maximum purchase price. Sometimes you’ll have to contribute your own money to your down payment too.

How Can You Find a Program?

If you’re interested in learning more about down payment assistance programs, you can contact the housing finance authority in your state or your local city or county government. The U.S. Department of Housing and Urban Development (HUD) also has state-specific information.

The Consumer Financial Protection Bureau has a tool that will link you to housing counselors where you live.

If you are going to apply for a mortgage and use down payment assistance, you’ll have to find a list of mortgage lenders who are approved to work with that particular program. Often, the local agencies and programs assisting can connect you with experienced loan officers.

Position Realty
Office: 480-213-5251

How Does a Pocket Listing Work?


If you watch real estate shows, you might occasionally hear a reference to a pocket listing. A pocket listing is a way for real estate agents to intentionally keep a home off the Multiple Listing Service (MLS) as they look for the right buyer.

A pocket listing isn’t publicly listed, even though it’s for sale. The real estate agent does private showings with potential buyers instead of putting it on the MLS, which is public-facing.

Pocket listings aren’t the same as having a coming soon listing. Coming soon is a way for an agent to designate that a home isn’t listed yet, but shortly will be on the market.

Pocket listings aren’t illegal, but they are frowned upon. The National Association of Realtors, the largest real estate agent professional organization in the country, essentially banned pocket listings for members in 2019. The NAR handbook says that within one business day of marketing a property to the public, the listing broker has to submit it to the MLS.

The NAR wants to ensure cooperation among real estate agents, which was one reason it cracked down on pocket listings. The organization also wants to ensure competition, meaning all buyers have a chance for a listing, and sellers get the chance for the best price.

Some agents can bend the rules to ensure they’re compliant with NAR guidelines while still keeping a listing to themselves.

The policy of the NAR is that listings must be added to the MLS within one business day of the seller signing the listing contract. If a seller signs with a listing agent on a Friday, for example, the agent can use the weekend to do private property marketing.

Why Do Sellers Like Pocket Listings?

It sounds somewhat counterintuitive to do a pocket listing, but there’s a reason some sellers prefer this option. Sellers might like pocket listings because they want to maintain privacy. They control who has access to the property and when, and everyone won’t know they’re selling immediately.

Some sellers like pocket listings to test the market to see what the response will be like to their selling price. With pocket listings, it’s possible to adjust the price without making it look like a price cut that would otherwise show up on the MLS.

The third reason for a pocket listing is that the seller might already have a buyer. A seller might want a listing agent who will sell their property to a specific buyer.

There are ways outside of a pocket listing to achieve the things above, though.

For example, if someone wants the privacy of their listing, they can ask their agent to put the details in the agent’s remarks so they aren’t in the public sections of the listing. They can also ask the agent to verify financing before they agree to showings.

You might miss out on the best possible offer with a pocket listing if you’re a seller. You cannot know whether the buyer you’ve chosen actually has the strongest offer.

There’s also the potential for a listing agent to violate Fair Housing laws if they choose who can see a home. There may be a greater risk of discrimination in these situations, so an agent has to be very careful.

Finally, pocket listings can affect home values negatively. If the sale isn’t in the MLS, it will not show up as a comparable listing if an appraiser or agent tries to determine its worth.

Again, while a pocket listing might have its advantages, they’re something to be cautious of for sellers and their agents because they also have risks.

Position Realty
Office: 480-213-5251

What Happens When Companies Buy Houses?


If you’ve ever seen signs for companies that say they buy houses, or maybe you’ve been approached by one, you might find yourself wondering exactly what it is that they do.

There are a couple of different types of companies that buy houses cash. There are those ones that you see advertising in your community, but there are also tech-driven companies that do it.

How Do Home Buying Companies Work?

If you want to sell your house, you typically will hire a real estate agent, and then they’ll place it on the MLS. If you want to sell it fast without doing work or paying a commission, then you might instead try to sell it as-is.

There are companies that buy houses as they currently are for cash. This can mean local cash buyers, investor networks, or iBuyers.

• A local cash buyer is typically just someone who will buy your house and either flip it or turn it into a rental.
• An investor network is one of those companies that you see advertising most often, and they’re local franchises. They don’t pay much for houses because they usually focus on ones that are in pretty bad shape, and then then they flip them.
• Then, there’s the term iBuyer. The term stands for instant buyer. These are companies that use algorithms and data in the form of what are called automated valuation models to determine what your home’s worth. Then, based on their data, they’ll make an offer.

What Are the Benefits for You?

If you want to sell your home quickly, one of the three above cash buyer options can be good.

The vast majority will buy your house just like it currently is, so you don’t have to make repairs or updates, nor do you have to worry about staging it.

They’ll usually be flexible in helping you find financing solutions, and you’re probably going to get a relatively fast closing. These companies don’t have to go through the traditional financing process from a bank, so they might be able to close in seven to 14 days.

You’re also avoiding real estate commissions and closing costs.

Are There Downsides?

While selling your home quickly and easily to a company can seem great, there are certainly some downsides you have to be aware of.

First, there’s a pretty high likelihood you’re not going to get full market value. You’re trading that for simplicity and lower costs.

There’s also always a risk of predatory tactics or even scams.

If a company is trying to pressure you into selling your home for far less than it’s worth, that’s a problem.

There are a lot of legitimate companies that do buy houses for cash, but not all of them are completely legit. You have to do some research if you’re thinking about having a company buy your house to make sure it’s not a scam.

How Does the Process Work?

If you’re interested in the direct-buying model, which is ultimately what all the examples above are considered, then you might wonder what the process looks like.

Companies might vary slightly in how they do things, but typically, the home buying company might come to you, or you could approach them. The buyer or company will get some general information, and then they’ll schedule a walk-through.

The buyer will determine the market value of the home once any updates or repairs are made. At that point, they’ll present the seller with an offer, which will include the price they’re willing to pay, a closing date, and terms of the sale.

There are negotiations, and then once everyone accepts the offer, a closing date is set.

When it comes to direct buyers you just have to think about what your priorities are and how those weigh against the potential downsides. If your biggest goal is to move quickly and avoid having two mortgages, a home buying company can be a good option if they’re reputable.

If you’re in no rush and you want the highest price for your home, then you might go the traditional route in selling it.

Position Realty
Office: 480-213-5251

Capital Gains Tax When You Sell Property


If you’re selling a home, what you make could be taxable. Depending on your property’s value and other factors, you might be hit with a big tax bill that you weren’t expecting.

Capital gains on real estate can be taxed, but there are things you can do to reduce or avoid what you owe to the IRS when you sell your house.

A capital gains tax is the fee you’re responsible for paying on profits you make when you sell an asset. Your capital gains taxes can apply to stocks, bonds, and tangible assets such as cars, boats, and real estate. The IRS and many states also assess the capital gains taxes on the difference between what you’re paying for your asset, known as your cost basis, and what you sell it for.

Capital Gains and Real Estate

The capital gains you might owe if you sell your home vary depending on your tax filing status and the sales price of your home. You may also be eligible for an exclusion. The IRS might allow you to exclude up to $250,000 of capital gains on the sale of real estate if you’re single and up to $500,000 on real estate if you’re married and file jointly.

If any of a certain number of factors are true, you then pay tax on the entire gain of the sale of your home.

These factors include:

  • The home wasn’t your main residence
  • You owned the property for fewer than two years in the five years before selling it
  • Not living in the house for at least two years in the five years before you sold it
  • You claimed the available exclusion on another home in the two years before selling this current home
  • Buying the house through a like-kind exchange, which is a 1031 exchange in the past five years
  • You have to pay expatriate tax

If you do owe taxes on what you made from selling your home, different capital gains tax rates can apply.

Capital Gains Tax Rates

If you owned the asset for a period of less than a year, then typically, short-term capital gains tax rates apply. The rate is the same as your tax bracket. Long-term capital gains tax rates will usually apply if you have owned the asset for more than a year. A lot of people qualify for a 0% rate, but depending on your income and filing status, you might pay 15% or 20%.

Avoiding Capital Gains Taxes When Selling a Home

Some of the things you can avoid having a tax bill from selling your home include:

  • The best way to avoid taxes is to live there for at least two years, which don’t have to be consecutive. If you’re a house flipper, you have to be careful here. If you sell a house you didn’t lie in for at least two years, your gains can be taxed. If you sell in less than a year, it’s particularly expensive because you may have to pay the higher short-term tax rate.
  • Determine if you qualify for an exception. You might still be able to exclude some of the taxable gains on the sale of your home because of work, health, or an unforeseeable event.

Finally, if you make any improvements, keep your receipts. The cost basis of your home will include what you paid to buy it and the improvements you made over the years. If your cost basis is higher, you may have a lower amount of capital gains taxes to pay. Remodels, expansions, and other updates can reduce your taxes.

Position Realty
Office: 480-213-5251

Can You Use Home Equity to Buy Another Property?


When you have equity in your home, you can tap into that and, if you’re strategic, use it as a way to build long-term wealth.

There are a lot of ways you can capture equity to build wealth. For example, you can pay off higher-interest debt or make home improvements that ultimately increase the value of your house. You can start a business or you can even invest in the stock market where returns might be significantly more than the interest you pay on your loan.

Another question people commonly have is whether or not they can use their home’s equity to purchase another property, which we discuss below.

Can You Use a Home Equity Loan to Buy a House?

In short, yes. You can use a home equity loan to buy a house, but that doesn’t mean it’s always the right decision in every situation. Using home equity can be a way to buy a second home or an investment property with caveats.

A home equity loan is a second mortgage, giving you a way to access the equity you’ve built in your home. Home equity refers to the difference between what you owe and what your home is worth.

The Upsides

If you’re thinking about using your home’s equity to buy another house, there’s a distinction you need to first make. Are you buying a second home or an investment?

If you’re planning to buy an investment property, using a home equity loan can give you more liquidity and make it less expensive. Benefits of using equity to buy an investment property include:

• You can put more toward your down payment. A home equity loan is something you receive as a lump sum payment so that cash can go directly toward a down payment. You’ll be a more competitive buyer, which is essential in the current market, and you’ll get lower interest rates and monthly payments.

• It can be harder to finance a second property because there are more stringent down payment requirements, so a home equity loan can be a more affordable solution and also one that’s more convenient.

• A home equity loan is secured with collateral, which is your current home. As a result, you get the benefit of lower interest rates.

If you’re buying an investment property, using your home equity can be a good wealth-building strategy. If you’re buying a second home, you have to consider that it’s not going to bring in income like an investment. That means that you’re going to be tying your home up in a loan and then taking on another loan, so you need to be in a solid financial position to make this work.

The Downsides

The downsides of using equity to buy an investment property do exist. These include:

• You’re swapping an asset for a debt. You’re taking the part of your home that you own, and then you’re putting it into a loan. Ultimately, no matter the specifics, you will have higher debt, so is that what you want?

• You’re vulnerable to housing market shifts, even more so when you own two properties instead of one. You’re doubling your risk if something happens in the housing market. For example, if the value of either of your properties goes down, you might owe more on your home equity loan and your mortgage, overextending you.

• If you were to default on your loan, you could lose both properties.

• You might end up having three mortgages but only two homes. Most home equity loans are second mortgages, so you have to combine this with the loan you’ll need for your second home, meaning three mortgages.

• Another downside you’ll have to weigh is the fact that interest payments on your home equity loan will probably not be tax-deductible because of 2018 changes in tax codes.

The big takeaway here is that, yes, using home equity to buy a second home is an option and sometimes a very good one. At the same time, there are risks and it’s not always the right decision, so you need to go over the details in your specific situation carefully.

Position Realty
Office: 480-213-5251

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