People who already own one house or condo who are looking to buy a bigger place (trade-up) or a smaller/cheaper place (downsize, right-size, or down-cost) are at an advantage now that the market has recovered. Whatever your equity position was in 2008, it is better today. That allows some owners to get enough liquidity to make the move.
HELOC stands for Home Equity Lines of Credit. When home equity went down during the bubble burst in 2006-2008, HELOC borrowing dropped drastically. Now that home equity is going up. The trend towards borrowing against the equity is back, according to The Boston Globe.
How could a HELOC make buying another house easier?
It is a good tool for buyers who are trading up or down-costing, who are short of liquid assets for deposits, buying costs, and closing costs.
Caution 1: To use a HELOC you have to have good equity in your current house or condo. If you still have a substantial debt on your current place, use caution.
Caution 2: You also need income to support your current mortgage, your HELOC, and any additional mortgage for the place you want to purchase. Many people with enough income also have liquid asset for their purchase expenses.
The basic rule for calculating how much you can borrow is that the amount of your principle, interest, tax and insurance cannot be more than 28 percent of your gross income. It is unrealistic to think that you can qualify to borrow the lion’s share of the cost of two houses on a typical income. Only if you own your current property at a high equity level, is it feasible to borrow against it to carry you toward your next place.
Who is most likely to benefit from using a HELOC to buy another home?
People who are downsizing benefit most from using a HELOC. Before doing this, research the value and marketability of your current home thoroughly. If your current place is well situated to sell high enough to cover your HELOC mortgage, and your primary mortgage is paid or nearly paid, you can borrow enough to buy your smaller/cheaper place for cash. Then carry the HELOC for a few months while you sell your former residence. The HELOC gets paid off at that closing; you keep whatever is left, less your transaction costs.
Who should not be using a HELOC to buy another home?
Borrowing against your current house if you are buying a bigger house, but don’t have a down payment is risky business. If your current house does not sell quickly, you could easily be stuck being house-poor until it does. If your income qualifies you for the mortgage on your current house, plus a HELOC, plus a mortgage on your trade-up house, then you have a large income. If you have a large income, but can’t save for a down payment, you have a large outflow of cash in your budget. Adding more debt to your budget seems like the wrong thing to do.
