In our last blog, we looked at refinancing an existing property for the purposes of getting a new home and keeping the other one as an investment property. This week, we’ll be sticking to purchasing a new home and renting out the existing one but leveraging your savings to do so!
You may not be able to get gifted funds for a rental property but you can get gifted funds for an owner-occupied purchase. If you aren’t able to refinance your home or draw enough equity, that doesn’t necessarily stop you from purchasing a second property. Using your own savings or getting a gift can always be a source of funds for your down payment on your owner-occupied home.
For example, let’s assume you bought a home 10 months ago for $430K (assuming 1.5% interest on a 25-year amortization and monthly payments) with a minimum down payment of 5%. Chances are that the home hasn’t appreciated enough in value (even in this market!) nor has the mortgage been paid down enough to give you access to equity. If the mortgage balance relative to the value is more than 80% of that value, there is no equity to access via a mortgage — you could only get additional funds if you sold the place.
In that case, the current balance would be roughly $425K. For you to consider refinancing, the home would need to be worth at least $530K. Even at that value, you would not be able to access any equity through a mortgage. So does that mean you can’t buy anything? Not at all! All it means is that you will need to use savings (or a gift) for your next property.
Another myth that’s out there is that gifted funds can be used for a down payment on a rental property. They can’t though unless it’s in the alternative lending space. So, if you’re someone who has a similar situation as above and is wondering if there’s anything you can do to get back in the market, here’s what we’d do:
- Since it was a minimum down payment on the current home, there hasn’t been enough time to pay down the mortgage enough in order to access any of the available equity
- This does not mean that you’ve put money into a house that you now can’t access but that would have to be done via refinancing
- Since you can’t refinance past 80% of the value of your home though, it means you’ll have to start saving or draw from existing savings
Just because you can’t refinance doesn’t mean you can’t buy another property. It just means you’ll have to use your own savings or receive a gift. The point is, we’ll always explore all the avenues available to help get you what you want and where you want to be! Be sure to check out our next blog where we look at reverse mortgages and how you can use one on your existing home to purchase a rental property.
Disclaimer: The opinions expressed herein are just that, and should be consumed as such. Always do your own research when considering investments in real estate or otherwise.
Contact the Kyle Miller Mortgage Agent team to learn more about your income situation and how it can affect your refinancing and mortgage application processes. We’ll provide you with different options so you get the best deal possible!
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