Home Equity vs Another Mortgage

Updated on July 03, 2010
B.A. asks from Miami, FL
11 answers

Good morning Mamas,
My husband and I are considering buying another house. We currently live in a townhouse with a small yard, but want something a little bigger without the association fees and a bigger yard. I'm considering not selling the townhouse and renting it out so that we can have additional income. So this is the question, should we take out a home equity loan or should we shop for another mortgage?

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answers from Tampa on

Interest rates are way better on a mortgage and easier to pay off then a home equity loan is. Also, if you take a home equity loan out and something should go wrong you could lose both places. But with a seperate mortgage you could be free to sell one of them if you had to.

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answers from Miami on

B. -
Can you sell your townhouse and be above water? If so, then I would suggest selling it and then buying a new house. I'm in Broward County - and I know that the market isn't any better in Miami-Dade.

Issues here: you will loose your homestead exemption on your townhouse property taxes as soon as you are living in a new house. You can only claim homestead exemption on the house you are living in....thus, you will need to consider whether the rent you can get on your townhouse will cover your mortgage, association fees, insurance, and property taxes as well as maintenance. Keep in mind that most renters expect that the house be freshly painted before moving in and you will have at least some repairs each time you get a new renter. Plus, although there are more renters today - they may not have good credit histories and are more likely to not fufill the terms of the lease.

Also, as soon as you have renters, you open yourself up to the possibility of lawsuits. I learned this the hard way when we were renting our townhouse in VA and the tenant claimed he slipped on the sidewalk outside and sued us. We had good insurance and they paid but still, it was a year of trouble/headache and honestly, the fact that he slipped on the sidewalk was not due to our negligence.

Finally, in this market, I would seriously not take out a home equity loan (higher interest rates plus the fact that home equities are still falling down here!) instead of a mortgage. The home equity loan ties the two properties together whereas mortgages keeps them separate.

Full disclosure: I am a financial planner in Ft. Lauderdale - this would be my advice if you were my client. Let me know if you have any further questions.


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answers from Davenport on

Chances are that a mortgage will end up being the better deal. However, if you have a mortgage on the townhouse then you may not qualify for another one. Also, be aware of illegal rentals. I don't have any idea what the rental laws are in Miami but if you rent out your townhouse and it is considered an illegal rental then you will be on the hook for fines, at a minimum.



answers from Dallas on

Do you research. A lot of banks won't let you take out a home equity loan on an investment property, which your townhouse would become if you bought another house. Check the rental market in your area and see if it would actually be additional income after you factor in HOA fees, mortgage, insurance, etc. Also, since it is income, you will have to pay taxes on it. Make sure you are able to cover both mortgages for at least 6 months in the event your tenants don't pay, or you have a stretch where you can't rent it out, or you decide to sell the townhouse. I had a rental property for 3 years and would never do it again. The stress of taking care of the property, problem tenants, and worrying about money wasn't worth it to me.



answers from San Antonio on

This really depends on the rental market for your area. Rentals are a huge risk, because they can be trashed and stay empty for a long time. Every time a tenant moves out there is a huge expense in fixing it up and keeping the mortgage paid while you look for a new tenant.

Unless you're certain that it would stay occupied at a reasonable price for you, I wouldn't risk it. But then, I'm very financially conservative, for better or for worse.



answers from Boca Raton on

Do you still owe on the townhouse? If so, chances are you won't get approved for much for another mortgage. My brother and sister-in-law tried to do this very thing and couldn't (both have good credit). Banks and lenders have gotten really stringent.

They were approved for a certain amount - say $200,000. BUT the amount they had outstanding on their house would have to be factored in. So if they still owed $150,000 on their curren house, they only would have gotten $50,000 towards the new home. Know what I mean?


answers from Orlando on

It depends - do you own your townhouse free & clear? Let's do the math on what will be cheaper a home equity that may be based on prime and a 30 yr fixed rate? Will the rent that you could bring in adequately cover all expenses?

This has been my field for 20 years - let me know what else you may need?



answers from Boca Raton on

The would be a very good idea if you can afford the two mortgages, since the bank will not consider the rental income when qualifying you for the new mortgage. Being a landlord is a full time job, but there is need for rentals especially now because of foreclosures. If you have equity on the townhouse, maybe you can consider selling. This is a buyers market so you can recoup the loss of selling low to the gain of buying low.
good luck.



answers from Jacksonville on

I would do A LOT of research before doing anything. It's a scary market out there right now and it's a scary world in the sense of job security. I teach and my hubby is a correctional officer and even we know that any day we could lose our jobs because no matter what they say on the news....it is that bad. That said, if you have the means to do this without causing yourselves to get way in over your head, research and find out what would work best for you based on that research. Renting is like the previous poster said, risky. It can be great if you get great tenants and have a fairly new home that won't need any fixing for some time. BUT do know that anything that goes wrong or that they leave trashed will end up on you. You can take the security deposit, but after that it's pretty tough to get anything more since the security deposit is made to fix whatever needs to be done once they move out or to return to them upon them leaving the house in fair condition. Some states require carpet be changed every few years or after every tenant, so be sure to look into that as well. If it's the right move for you, I say go for it with the financial decision that is best based on your research and speaking with some professional mortgage brokers.

Good luck to you!



answers from Tampa on

My husband (finance CFA) says to shop for another mortgage. This all depends if your townhouse is fully paid for and you expect to be able to extract enough money from home equity loan to pay for your new house without a mortgage, then if anything happened to your income and you can't afford to pay the loan, then it would only affect your town home and not your new house. However, home equity loan generally carries a higher interest rate than a mortgage. Therefore, you will be paying more interest.
Good luck on your real estate shopping and if you have any other questions, keep me posted!



answers from Miami on

I don't know what your exact financial situation is but:
1. there are alot less fees with a home equity
2. The HE rates should be just as low as a morgage
3. the payments are alot lower with a home equity
4. You're home owners insurance on the 2nd home can be lower with the home equity.
Just see if you would be entitled to the $8,000 cash back from the government if you do a morgage.

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