Home Equity Loan for second house down payment?

Some thoughts?

Situation: Military living outside DC with PCS orders to CA. Own house in expensive neighborhood and want to keep (because I won't be able to afford to buy if we have to come back, which is likely). Have about $200k equity in it.

We have my military officer salary, and my wife's nurse salary. She doesn't have a job lined up out west yet. We can rent our DC area house for our mortgage, so that's good. Interested in buying in the Sacramento area. We don't have the cash for the 20% down on a $500k place. We have plenty of retirement savings and plenty of emergency fund savings- enough for over a year of vacancy in our current house, but that doesn't really happen in our 'hood. Our tour in CA is 3 years, with potential for me to retire at the end of the tour.

Any reason not to take out a home equity loan for down payment on a house out west? Any pitfalls? Should I take the HEL out before we apply for the mortgage, or do both at once? Do I need to have a signed rental agreement on the current house before applying for the second loan(s)? I'm thinking the perfect place is before we've moved, while my wife is employed (she'll have to quit to move west, then search once out there), but while we have a signed lease, we should be in a spot to make it all come together.

Assuming that both housing markets are relatively stable, you're moving equity from one house to another.

The reason not to do it? You're in Sacramento for 3 years. What is the break even point between rent and buying? I suspect that you'll be toeing the line pretty well there, and IMHO it wouldn't be worth the hassle. Unless you plan on keeping the house in Sacramento to rent out, this sounds like a losing game.

I say rent. But I'm stupid.

spitfirebill wrote: I say rent. But I'm stupid.

Actually, this is the best advice. IF something goes wrong, you could lose both properties. There is risk. Sounds like you want to retire in DC, so rent in CA for 3 years..no brainer.

I say that if you can't afford the cash for the 2nd down payment, you don't need that 2nd house. Too dangerous. Rent.

For three years I would rent. I know people say that renting is wasting money, but keep in mind the transaction costs alone, you're looking at the house appreciating by at least 10% over three years just so you can break even.

Unless you do want to have a house in Sacramento as well as in DC, I would think that's too much of a financial risk.

Right. Roger on all. The reason we're looking at the buy option is that I'm considering retiring from military out there. Decision not made yet. I've got family in the Sac area that could look after it for me if we decided to rent it when we left. Only reason we'd come back here to DC would be to continue my career in the military and get my (now 8 year old) through high school.

Thanks for the thoughts- reality check says rent. The intangible is that we like owning so we can change/upgrade things, and live in a decent area. Most rentals are in dire need of updating, but there is certainly a financial tradeoff, and assumption of a lot of risk.

Another reason I like renting first - which may or may not apply to your situation - is that it's a good way to determine which area you want to live in without committing a ton of money.

Not that I've taken my own advice with the last two (my only two) house purchases...

Why have two payments ?

Hi Teh E36 M3,

Sacramento is behind on the recovery curve so you may be able to negotiate a rent to own agreement on a property that’s been vacant for a while. Landlords tend not to charge much of a premium for them as they know most people won’t act on the agreement.

Another reason to consider rent is that it will give you 3 years to sniff out a good deal, and find an area you really want to live in near Sac (or not).

If you want to retire in it. Careful consideration seems to be appropriate.

In reply to Teh E36 M3:

After the financial crash of '08, I didn't think they still did these loans.

I got mine in '03 as an 80/15/5, where we put down 5%, the 15% was a piggyback home equity loan and the 80% was the main mortgage. The piggyback prevented PMI and I was able to re-finance it from 7.25% down to 5.49% a couple of years after we initially got it. That interest is tax deductible, vs. PMI, which I don't think is deductible.

Only a few more years, and it's gone.

I guess it's a good setup if you can swing it and if it's not variable rate.

I believe a HEL will only give you a % of what the house is valued. Some borrowers like to know what you are using the equity for?

If you rent the house in D.C., that should pay for your mortgage. Then, with your O-X rate of Basic Allowance for Housing that the Military will give you to live in CA, plus the COLA, you should do pretty good just renting. If you decide that that is the place to retire, you have time to sell in D.C. and find the perfect house in CA.

Good Luck! (Retired Military-2014)

FWIW, I retired from the military after 20 years in 2009. Since then we've lived in 3 different states (two of which I would never have imagined living in a year before I retired) and I've worked for 4 different employers. May or may not be applicable to you and your situation, but I toss it out here for you to consider just to be aware that things may work out in unexpected ways after you retire.

Don't know the west coast market, but a colleague rented his 700k suburban Philadelphia home to a navy Dr. and his wife for a few years when he couldn't sell right away and he was moving to Pittsburgh and the renters would be moving again in a few years. I'm sure his house was beautiful and it worked out well for all. Might find that situation out there.

You can pull equity out of your home at any time, I would rent in your new area first. Once established in your new site, you may find a neighborhood you like better than the ones recommended.

Have you met with the Housing Manager at your new PCS?

Dan

seems like doubling up your risk if something goes awry. thats alot of debt, a fresh first mortgage, and another debt against your original equity. Thats basically taking your biggest asset atm and turning it into another debtweight.

is there a reason you want to hold the DC house? is it a net positive after expenses if you have it reliably rented?

Be aware that many home equity loan contracts require you to occupy the subject property as your primary residence.

A second lien on a property intended for rental may be available, but at less attractive terms.

If you think they won't notice - lenders have a word for that. Fraud. (Not saying that you would, but I'm always surprised how many otherwise honest people do.)