Unlock Your Equity for an Investment Property

For some lucky homeowners, the recent surge in home prices has given them enough equity to fund the purchase of a new home. However, most homeowners have mortgage rates below 6%, which is lower than the current national average. Axios reports that three-quarters of Utah homeowners have rates under 4%.

This causes many people to stay put even when their home no longer fits their needs; a phenomenon known as the “lock-in” effect.

But there is an option. You may be able to turn your existing home into a rental property and buy a house that better fits your current needs. This article covers the criteria for using home equity to qualify for a new primary mortgage and gives a snapshot of the entire process.

This model is optimal for those without a lot of debt, who have a high equity in their current home, and a low monthly payment. Our trusted mortgage advisor, Cori Pugsley, recommends consulting your lender, preferably during the analysis process, but definitely before loan application, for advice on timing so as not to damage your credit and optimize your rate. It’s critical to work with a trusted real estate agent and mortgage advisor to provide the financial modeling you need to determine if this is a savvy investment. Here’s an outline of the process to get started:

Process

1. Conduct a rental analysis to determine current market rate rent.
   • There are free options like Zillow Rent Estimate and paid options like Rentometer, or you can contact a real estate professional for help determining market rate rents.
2. Meet with your mortgage advisor to discuss financing options.
   • Second mortgage on existing home to fund down payment on new home. Again, the goal here is to borrow as little as possible and pay off quickly.
   • New home mortgage pre-approval to see what amount you can borrow.
3. Calculate the Return on Investment (ROI).
   • Yubedo provides this quick summary of ROI components and steps to calculate, and there are many online tools for self-guided investment property analysis. However, we recommend engaging your local Realtor, property manager, or lender to provide the analysis making it easy for you to understand if the investment aligns with your financial goals and risk tolerance.
4. Shop, purchase, and move-in to your new home.
5. Inspect your existing home and establish a premarket checklist.
   • Make sure your property is rent-ready and all major systems are functioning well.
   • Use proceeds from your second mortgage to fund maintenance and repairs if needed.
6. Market and lease the property.
7. Collect rent, manage property, and pay expenses.

How Much Can I Borrow?

You can borrow up to 90% of your home’s equity to fund a down payment on a new home loan.
This payment will be factored into your total debt. It’s smart to borrow as little as you can for a qualifying down payment. Consider using rental profits to pay the loan off faster and avoid additional interest that would otherwise accrue.

The required down payment will depend on the amount of your loan amount: for loans under $766,550, the minimum down requirement is 3%; for loans above $766,550, the minimum down requirement is 20%. You may be able to use the equity of your home to put a piggyback (a.k.a. second) on the home that requires you to bring 10% down. Consult your lender for details on specific options.

You want total debt under 45% of your gross monthly income to qualify.
Debt includes:

1. Existing home mortgage payment
2. Equity line of credit (to fund down payment for new home)
3. New mortgage payment (includes taxes, insurance, interest, HOA)
4. All debt (credit cards, car loans, child support, utilities)

Unlocking your equity can be the first step toward investing in real estate. If you’re interested in learning more about the benefits that are possible with real estate investment, we’re happy to discuss the options and begin the process.