Author Topic: Simple question... easy answer? Using Home Equity Lines vs. savings reserve  (Read 3157 times)

jwilliams0215

  • 5 O'Clock Shadow
  • *
  • Posts: 89
  • Age: 35
  • Location: Tampa, FL
  • WinningWilliams
    • WinningWilliams
Situation - I have a paid off single family house but am considering a second home to move to (would become the primary residence). I have $45K+ and a growing amount each month saved for this potential house. It's currently sitting in an online savings account.

My best guess for liklihood/outcome of making this purchase is as follows:
In 1 - 3 months - 15%
In 9 - 12 months - 50%
Decide to not move - 50%

1) Given the liklihood we will remain in the existing home for at least a year, should I go ahead and invest the house savings in an index fund? If we are able to find a deal that pushes us to make a move couldn't I just utilize the value in the existing home that doesn't have a mortgage for a down payment?


matchewed

  • Magnum Stache
  • ******
  • Posts: 4319
  • Location: CT
Do not invest down payments in investments which contain volatility risk when you are saving for the short term. It is an undue risk for a goal you need to execute soon.

*edit additional things below as I read more carefully

As for the second part can you use a HELOC to buy another house? I guess it depends on the rates of the HELOC and the mortgage. It sounds like taking on a great deal of debt but if your rental can cover all the costs and then some of the debt for that house I don't see why not.

I'm sure someone can better outline the specifics you need to analyze.
« Last Edit: April 10, 2014, 10:46:52 AM by matchewed »

nereo

  • Senior Mustachian
  • ********
  • Posts: 10337
  • Location: la belle province
    • Here's how you can support science today:
My personal take would be to not invest funds in the market that you may need in the next two years.  Certainly not something you have a 50% chance of needing in the next 6 months.

As for using your existing home to put a down payment on another home, it's probably best to check with your lender.  You might be able to use a HELOC (never tried it myself).  If your rate is low (<4%) you may consider doing that and investing the $45k.

Thegoblinchief

  • Guest
You can use a HELOC to buy another house. Never done it myself, but I've seen it mentioned on threads before.

Do the paperwork on the HELOC. They're often useful to have around anyways. Once you know the credit limit and the rate, make your decision then about how much $ to invest.

Alternatively, pick a conservative investment like a bond fund that gets you something better than 0%.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27774
  • Age: -999
  • Location: Traveling the World
You can use a HELOC to buy another house. Never done it myself, but I've seen it mentioned on threads before.

Here's how: Writing a check from a HELOC is the same as from a checking account.  Write a check from your HELOC to yourself, deposit it in your bank, wire the funds from your bank to the Title Company.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

jwilliams0215

  • 5 O'Clock Shadow
  • *
  • Posts: 89
  • Age: 35
  • Location: Tampa, FL
  • WinningWilliams
    • WinningWilliams
Great info and really appreciated. I'll cross off getting married and honeymoon to Costa Rica in next couple weeks then go forth with this information at hand!

TomTX

  • Magnum Stache
  • ******
  • Posts: 3382
  • Location: Texas
You can use a HELOC to buy another house. Never done it myself, but I've seen it mentioned on threads before.

Do the paperwork on the HELOC. They're often useful to have around anyways. Once you know the credit limit and the rate, make your decision then about how much $ to invest.

Alternatively, pick a conservative investment like a bond fund that gets you something better than 0%.

I used a HELOC to pay off the original high-interest mortgage on our first house.  Cut interest by ~3.5% Sure, the HELOC was adjustable, eventually. But it would have been almost impossible to not come out ahead with the restrictions on adjusting. Why a HELOC? No closing costs. The remaining loan was small enough that the closing costs were just disproportionate.

I used a moderately complex strategy to buy the second house when we moved.

When we were planning to buy another house, we went interest-only on our HELOC payments to get us over 10% for the down payment on the new house.

80% conventional first mortgage (fixed)
10% second mortgage (fixed)
10% down payment

When the first house was sold, paid off the HELOC and the second mortgage with a fair amount of cash left over.

NOTE: The first house was in a college town in an area that was mostly rentals. We knew sales were good in the area, and we could easily rent it if it didn't sell - but didn't want to be absentee landlords for college students. Probably should have hired a management company - but that's hindsight.