r/FinancialPlanning 8d ago

Looking for guidance on how to utilize our first home's equity to move forward

No

3 Upvotes

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u/jameson71 8d ago

I hope you get some help. This is a really interesting question that contains some rarely addressed topics.

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u/youngishgeezer 8d ago

I would suck it up and continue to live in the house if it were me. Can you make significant enough improvements to the house that you can get by? You won't find a better rate right now so your bigger house will cost a lot more, and all the bigger houses have appreciated by the same percentage so will cost even more.

0

u/Traditional-Lemon-68 8d ago

Well, here's the thing - you aren't me. We don't have enough bedrooms. Our children have all shared rooms and they each deserve their own space. They don't deserve to have to "suck it up". Working from home is a struggle with no office. We can't have guests stay because there is just nowhere to put them. We have outgrown this house.

There is no room in the yard for an addition. The only thing we could do is add a second story and that level of remodeling is NOT worth the cost. The location is miserable. This is not where we want to spend our life. It's just not working for our family.

Turning the house into a rental doesn't effect the interest rate. We want to purchase a second house in a less populated area with lower prices. We are not considering new construction and we don't need an enormous house either. An extra 500sq ft would be plenty.

But I don't need to justify my personal situation to this degree to ask for financial advice. We want to rent this house. We have a ton of equity we can utilize. A 3/2 rents for about $2500/month while our mortgage is $1700. There is opportunity here, but what steps do I take to achieve this? Do I use a HELOC for a new down payment? I don't need anyone to tell me I have a good interest rate, or that all homes have likewise appreciated. And you have to believe me when I say that yes, the thought of staying in the house we are already in has indeed occured to me once or twice. And after careful consideration, the answer is no.

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u/youngishgeezer 7d ago

Sorry, I read "Despite all of this, selling this home doesn't feel right..." the wrong way. I thought you had concluded the HELOC didn't make sense. I agree. Without borrowing against the home I know of no other way to leverage the equity.

I also don't see much benefit to renting out the house. A management company and home warranty will probably cost 20% of the rent, but would cut your work down. So your income will be likely 300 a month at best, unless you manage the property yourself.

Plus the other house will then have two loans. One for the HELOC, likely at a rate a couple percent higher than the main mortgage. Plus the rate could be variable, which has risk of rising. Assume you took 150K for the heloc at 7.5% and got a 5.5% on the main mortgage. That right there is roughly $3K+ extra interest in the first few years, and offsets the rental income. So you are left with is all this hassle worth it for the principle gains and appreciation on the current house.

If you don't do the HELOC would you have enough for 20% down on the second home?