Dear Dr. Don,
I own my current home free and clear of any mortgage debt. It is paid off. I’d like to take out a mortgage on the house and use the money to buy another home as an investment and also pay off some bills. How easy would that be? Would it be a good idea?
— George Gables
Using the equity in a residence to finance all or part of the purchase price of another home is a common practice. You just need to have sufficient income and good credit to qualify for a cash-out first mortgage or a home equity loan.
How wise is it to use equity in your current home to finance an investment property? The answer varies, of course. Regarding yourself, you have all the equity in your home invested in real estate. Now, you’d like to leverage the investment to buy a second property. You’ll be ahead of the game if the investment property earns a return that can cover the financing costs, taxes, insurance and maintenance through rental income and price appreciation.
I’d rather invest in a professionally managed real estate investment trust, or REIT, that is diversified and trades on an exchange. Would you mortgage your home to invest in a REIT? I don’t want to give you investing advice here. But if your answer is no, because it’s too risky, it may mean that you’re not a good candidate to mortgage your home to buy additional real estate.
It can make sense to tap the equity in your home to finance your other debts. The interest rate on a mortgage is lower than most other forms of consumer financing and in many cases is also tax deductible. At the same time, I have two concerns about using the equity in your home to finance your other debts. Will you run up your credit balances while still having to manage the mortgage debt and the credit card debt? I hope not. The other worry is that if you take 30 years to repay the mortgage debt, even with a lower interest rate, you’ll end up with higher total interest expenses. Proceed cautiously.
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