Like much of the rest of the country, Jersey Shore home values rose significantly over the past few years. In fact, the Philadelphia Business Journal reported that our very own Margate was the highest-ranking New Jersey town on their list of home value increases, coming in at #16. Home values rose over 80% in the past five years, with a 7% increase in just the past 12 months alone. It seems appropriate that many people may want to tap into their home equity to buy a second property. But is that a good idea? Let’s weigh the pros and cons first.
Using Your Home Equity to Buy a Second Property
First of all, why are buying a second home? Will it be a vacation home for just your friends and family to enjoy? Or are you thinking about increasing your financial portfolio by purchasing an investment property? Keep in mind that you must qualify for both mortgages (your current one as well as whatever you borrow to purchase the second home). With an investment property, you offset some of your costs with the rental income you receive. But if you decide that you want a Jersey Shore vacation home strictly for personal use, you won’t have that rental income to help pay for it.
Pros
You can use your home’s equity to put a larger down payment on a second property. This makes you a more attractive buyer to sellers, giving you a “leg up” on the competition. Plus, banks require a higher down payment for a second home. You cannot get away with just 3.5% or even 5% down. Lenders want to see at least 10% down…unless you plan to pay all cash for the second property. By using the equity in your current home, you you can easily step up to the plate to meet those requirements. Lenders also charge a lower interest rate for a home equity loan as well. This saves you money.
Cons
Like I said before, you end up with more than one mortgage. In fact, since a home equity loan acts as a “second” on your current mortgage, you actually end up with three mortgage loans (if you must borrow money to pay for the second property). And since your first home acts as collateral for your equity loan, if you default on any of your mortgages, you could end up losing both properties. Also, with two properties you double your risk of finding yourself on the wrong end of the market if it shifts downward. Finally, due to changes in the tax law in 2018, interest may not be tax-deductible on a home equity loan.
So, bottom line. Can you use the equity in your current home to buy a second property? Yes. Should you? It depends. Discuss the pros and cons with your lender or financial advisor before deciding on whether or not this is the correct plan of action to take.
Sherri Lilienfeld, Apex Prime Realty, Your Source for Jersey Shore Real Estate