Homeowners who gain equity through rising home values or diligently paying down their mortgage might want to continue investing in real estate. You can leverage your house to buy a condo to rent or use as a second home. First, determine the equity you have in your home and the best way to access it. Before making the investment, also consider the potential pitfalls in borrowing against your primary residence.
Home Equity Considerations
Home equity comes and goes over several years as housing markets boom and bust. You can buy a condo immediately or wait after tapping into your home's equity. Under the best loan terms, lenders allow you to borrow up to 80 percent of your home's value, leaving 20 percent equity in the property. Condo prices typically rise as home values increase. As such, taking out the equity when your home's value is high might hurt a subsequent condo purchase because you face a higher price and monthly payment. Waiting for prices to decline after accessing equity, however, might allow you to buy in cash or with a large down payment, leaving you with minimal debt and more equity in the condo.
Accessing Home Equity
Aside from selling your primary residence, you may use equity in the home by refinancing or taking out a second mortgage. A cash-out refinance pays off the existing mortgage on your house with proceeds from a new loan. The new loan balance covers you previous balance and refinance closing costs and yields additional funds which you can use to buy a condo. A secondary mortgage lien on your home known as a home equity loan or a home equity line of credit may also allow you to buy a condo. A home equity loan is a closed form of credit and an equity line is revolving credit, much like a credit card, which uses your home as collateral.
Using equity from your primary residence is risky because the lender may foreclose and take your home away if you can't repay the money borrowed. The risk of foreclosure increases substantially when you borrow more than 80 percent of the property's value. If values drop after taking out the equity, you can end up owing more than the home is worth. Purchasing a condo using your primary home's equity increases your personal housing costs. Additionally, you have condo expenses that can make it difficult to keep up with both properties. For example, you owe property taxes, condo association dues and homeowners insurance for a condo, as well as mortgage payments if financed.
In addition to having sufficient equity to cover a condo purchase, consider whether it makes sense for your financially. If you plan to rent the property out, determine whether you have sufficient reserves to cover maintenance and vacancy. Also consider whether the rent you charge will cover the monthly condo association expenses and if you must come out of pocket each month, can you reasonably afford the extra obligation? The mortgage lender on a refinance or second mortgage may deny your loan if it knows you intend to use the equity to buy an investment condo and do not have enough income to cover the potential costs. A condo lender will also ask to see what you owe on your primary residence to ensure you can take on the condo expense.
- Bankrate.com: Using Equity to Buy A Second Property
- The Truth About Mortgage: Are Mortgage Rates Higher for Condos?
- National Council of State Housing Authorities. "FHA Issues New Review Requirements for Condominium Loans." Accessed May 11, 2020.
- First Heritage Mortgage. "What Is a Non-Warrantable Condo?" Accessed May 11, 2020.
- United States Government. "Code of Federal Regulations: Title 24, Housing and Urban Development. Part 234, Condominium Ownership Mortgage Insurance." Accessed May 11, 2020.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.