Members of the Coast Guard and their families know that a PCS relocation can sometimes happen without much notice. You’re settled in your new home and just getting used to the area when duty calls and it’s time to move again.
While you usually have time to plan a move to some degree, that is sometimes a luxury not available when the relocation is unexpected. So what is the best way for Coast Guard families to secure a home in a different state with little or no warning to prepare financially?
If you’re not ready to sell your current home, you may consider using the home equity you have built to make a down payment on a new home. This may sound complicated, but the work you do to protect our country is important and complicated – let SeaWest help you through this financial hurdle so you can keep your focus on your responsibility and your family.
What Is Home Equity?
Home equity is the difference between what you owe on your mortgage and what your home is worth. For instance, if you owe $150,000 on your mortgage and your home is worth $225,000, you own $75,000 of your home’s equity.
While building home equity is traditionally a lengthy process, current housing market trends have resulted in an equity increase for mortgage holders nationwide. Owning more of your home is a positive way to build stability and security, but it is also a way to build your investment portfolio.
Tapping your home equity can open doors to a plethora of opportunities, including putting a down payment on a home in another state.
How Do You Access Your Home Equity?
There are two primary ways to access the equity in your home.
Home Equity Loan
With a home equity loan, you will receive a single, lump sum that you will pay back in fixed, monthly installments. A home equity loan is sometimes referred to as a “second mortgage” since your house acts as collateral. The amount you can borrow is partially based on your home’s appraised value.
For example, if you bought your house for $200,000 and put down a 20% down payment or $40,000, you would have a $160,000 mortgage. Before making any additional payments on your mortgage, you would have $40,000 in home equity that could be available to you through a home equity loan.
SeaWest is happy to offer our members competitive rates on our home equity loans. Secure a 15-year home equity loan at a fixed rate. We work so you can leverage the power you’ve built in your home!
Home Equity Line of Credit
Unlike its fixed counterpart, a home equity line of credit (HELOC) is a revolving line of credit that you can access as needed. HELOCs have a draw period, during which you make interest-only payments, and the repayment period, where you will be required to pay back the amount borrowed. HELOC rates are variable, meaning they can fluctuate with the market. Also unlike home equity loans, there are rarely closing costs associated with a HELOC.
If you are unsure how much money you will need, HELOCs allow you access to home equity but you only have to withdraw funds as you see fit and make interest-only payments on the money you borrow. This is why HELOCs are sometimes compared to credit cards. Be sure to determine if there are any fees associated with closing a HELOC early.
SeaWest members can be confident that they have a partner that can help them through the HELOC process. The money will be there if you need it, but you won’t be required to pay any interest on funds you don’t withdraw. We offer 25-year HELOCs at competitive rates.
The Good, The Bad, and the In-Between of Using Home Equity as a Down Payment
We have established that it is possible to use your home’s equity to put down a payment on a second home and we’ve listed some examples of ways you can tap into the equity in your home. But is it a good idea?
As with most things, there are pros and cons to this scenario. But there are also some murky waters in between the pros and cons where it can be difficult to know where to steer. Let’s take a closer look at some of these pros, cons, and in-betweens. As always, SeaWest is here to help guide you through these choppy seas.
PRO: Take Advantage of VA Loan
If you used your VA eligibility status to take out a loan on your current home, it may be worthwhile to take advantage of the savings associated with it to retain your home and access its equity to purchase another home in your new location.
Backed by the Department of Veterans Affairs, a VA loan allows eligible veterans, service members, and their spouses to purchase homes with little to no down payment at a competitive interest rate. With these generous conditions, you can build the equity in your home and access it for many reasons – including making a down payment on another property.
It is also possible to take out multiple VA loans, but it can be a bit tricky. Be sure to research what is involved with multiple VA loans before pursuing this option.
CON: Three Mortgages
Yes – three!
If you’re using the equity in your current home to put a payment down on a new property, you will have three “mortgages”:
- The first mortgage on your main home
- The second mortgage (home equity loan or HELOC) on your main home
- The first mortgage on your second home
That is a lot of mortgages! Budget wisely to make sure you can afford to keep your finances afloat. Remember, any home equity loan means your house is offered up as collateral. If you default, you risk losing your home.
IN-BETWEEN: What Will You Do With Your First House?
Not many people will want to have two homes and have one sitting empty. So, if you’ve moved to another state but used the equity in your first home, what do you do with that home?
This is an important question. If you decide that you want to sell your house, know that you will be required to pay off any liens associated with the property – including any home equity loan or line of credit. Make sure you are not in a situation where you end up defaulting on one loan (or more).
Alternatively, you could use your first home as an investment by turning it into a rental property. This could help you bring in some extra money while keeping both properties.
PRO: Cash Reserves
If you’re using home equity to make a down payment on another home, you are retaining your cash reserves. By taking out a loan, you don’t have to tap into your savings. This means if things go sideways, you have a buffer.
Plus, you come out ahead with a home equity loan versus other types of loans. Home equity loans often have lower interest rates than other forms of financing.
Typical to most mortgages, home equity loans do come with closing fees. HELOC closing costs may be lower than those on a home equity loan, but there may be other fees. Be sure to review all documents from the financial institution before making a decision.
At SeaWest, we will work with you and your situation to make sure you have access to the very best products and services to meet your needs without any hidden fees or penalties.
IN-BETWEEN: Are There Other Options?
Of course! If you want to own multiple properties, using home equity is not your only choice.
In addition to accessing your savings or other nest eggs, cash-out refinancing may be worth a glance. This type of refinancing allows you to replace your current mortgage with a larger loan and take the difference as cash which you can then use as a down payment on a second home. Many rules need to be considered and certain qualifications must be met to make this the right move for you.
Using Home Equity to Purchase a New Home With SeaWest
Being a member of the Coast Guard means you have to be ready to move at a moment’s notice. You and your family are always ready to go where the country needs you to travel!
There is a lot to consider when deciding whether to use home equity to purchase a new home. Our home equity loans and HELOCs can help you no matter the circumstances. There is much you can do with home equity; let SeaWest be your guide.
Learn more about our home equity loans and HELOCs. As always, a friendly SeaWest representative stands by ready to assist.
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