How Do I Use A Home Equity Line As Your Down Payment

  • Post category:Blog

HELOC: Most Homeowners Don’t Use Them For This

A home equity line of credit (HELOC) works great for home improvement projects or to consolidate debt.

But most homeowners never use them for this: to make a down payment on another home purchase.

Whether you are buying a second home or investment property, or just want to move without selling your current home (yet), a HELOC is a fantastic tool.

Here’s a real-life story of a couple that bought a new house, putting 20% down using a HELOC, and avoided private mortgage insurance (PMI) on the new home

A Creative Down Payment

As the Johnsons enter their golden years, their goal is to make their next home purchase their final one.

They would like to sell their current home prior to purchasing a new one.

This is a good idea for a couple of reasons.

Even though they qualify, they don’t particularly want to carry two mortgage payments at once.
They would like to use their $100,000 in equity position towards their new home.
Using the proceeds of the sale for a down payment would get them out of paying private mortgage insurance (PMI), as well as get their monthly mortgage payment down to a comfortable amount.

The Challenge

It’s a seller’s market, which is great for sellers, but not so great for buyers. Home shoppers face fierce competition.

There are fewer houses on the market than there are buyers looking for them. This results in many multiple-offer situations.

It’s tough to get a home with a contingent offer when you’re going up against non-contingent one. For instance, if you say you need to sell your home before closing on the new home, the seller will likely go with a first-time home buyer with no contingency.

But, thanks to a good equity position in their current home, the Johnsons could get creative.

The Solution

They didn’t have to sell their existing home prior to purchasing their dream home at all. Their lender helped them come up with an option to tap into their current home’s equity position.

Mr. Johnson applied for a HELOC. This allowed him to use the equity in his current home as the down payment for his new home.

The Johnson’s were approved for a $100,000 line of credit. This was enough to cover the 20 percent down payment necessary to avoid paying PMI.

Later, when Mr. and Mrs. Johnson sell their current home, they will pay off this home equity loan, along with the other mortgage on their existing home.

Thanks to that seller’s market we are currently in, the Johnson’s aren’t concerned about carrying multiple mortgages as once. Priced correctly, their existing home should sell rather quickly.

Source: The Mortgage Reports