your Equity to Finance New Property
I financed a home for a couple
a few years ago in an area near San Antonio,
TX. Yesterday I received a call from them
asking about a mortgage to buy some land near
a lake where they would one day build a cabin.
I told them they didn't want my money, and
sent them on their way.
Why didn't I immediately take a loan application
for a lot and construction loan? More money
for me, right? Easy. They didn't need it.
But let me explain.
When they bought their first home, they put
about 40% down, so right out of the gate they
had some really decent equity in their property.
In addition, their home value has nearly doubled
in four years time. That's a lot of equity.
In this case, about $600,000 in equity, which
I suggested they use instead of a loan to
buy an undeveloped lot.
I've seen this on more than one occasion
where clients simply look right past their
biggest asset when exploring financing options
and zoom right toward construction loans,
lot loans or loans to buy a ski condo. Rates
for properties other than a primary residence
are not only higher, but they also require
a minimum down payment. When you have some
equity in your home, look there first for
financing. And you usually have two distinct
A straight equity loan will typically be
a second mortgage, assuming there's a first
mortgage already in place. Second mortgages
will have a slightly higher rate than a first,
but not by much. And many times there are
few, if any, closing fees associated with
second mortgages. My client in San Antonio
simply took out a 15-year fixed equity second
with his Credit Union for around 7.00%, then
bought the lakefront property outright. No
mortgage, no closing costs, no worries.
Another option may be to refinance the primary
mortgage to a lower rate while pulling equity
out of the home in one single swoop, called
a cash out refinance. It's fairly easy to
decide which method works best. If the new
monthly payment on a cash out refinance is
lower than just adding the payment for a new
second, then a cash out refinance may be your
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