Hey, Kyle here with WintheHouseYouLove.com.
In this video, I'm gonna show you how to buy a house.
Using your home's equity.
So if you already own a home and you wanna buy maybe a new home to live in or a new
investment property or a second home, you can use your home's equity, the money
currently in your home to buy another one.
And you can do that without having to refinance to a higher interest rate
like that's in the market right now.
So first of all, let's understand what home equity is and how it works.
So home equity is how much money you have in your home.
Okay, so the way that we figure this out is we take the market value
of your home minus the amount that you owe on it, the loan balance.
And that shows us how much equity you have in your home.
So it's not direct money and you can't just go, you know,
pull like it's not like a bank.
You can't just go like grab the money from your house somewhere.
It's a theoretical value of money that's in your home based on the market value.
So that's what the equity is.
And there's a couple tools that we can use to actually pull that equity
out to leverage that equity, and then we can then go purchase another home.
So a couple things that we can do with the equity that's in your home is number
one, is you could buy a new primary residence, a home that you're going to
live in, and a lot of people do what's called the stepping stone approach.
The stepping stone approach is where maybe the first home that you bought.
Wasn't everything that you wanted.
That's perfectly fine.
Most people don't buy their dream home as their starter home.
So what you would do in this situation is maybe you bought a home and maybe you
have a growing family, or this current home doesn't fit all of your needs.
So you bought the home here that maybe fit 60% of your needs.
You use the equity that's built up in here to then buy another home that maybe
that now meets 80% of your needs, and you're kind of taking this stepping stone
approach with the houses that you buy.
So when you do this, you could buy a new home that you're going to live in and
use the equity from your current home to pay for the down payment and or the
closing costs for that home as well.
Okay?
You could also look at buying an investment property.
Maybe you love where you're at and it's perfectly fine, but you want to
get into investing a little bit and you want to use your home's equity.
You can do that.
You could also do things like paying off high interest debt and
also creating an emergency fund.
Those are some other ways you can use equity as well.
There really isn't a limit to what you can do with your equity.
It's really up to you.
But these are common strategies on why people would want to
pull equity out of their home.
So some pros and cons here.
Number one is it doesn't force you to dig into your savings.
That's the big problem.
You know, saving up for your first home was probably a task, and saving up to buy
another home is also difficult as well.
And so it helps you not dig into the savings and take advantage of the,
basically the savings that you've been putting into your current home.
It's also pretty easy to access the equity in your home and you often don't
have to refinance your first mortgage, especially for people who bought in
the past couple years when interest rates were down closer to around 3%.
Now with interest rates around mid 6% it's a lot easier to be able
to pull equity out without having to refinance your first mortgage.
Also some cons, some things to keep in mind is that it does obviously decrease
your home equity, so this can put you in a more risky situation in the future.
Also the new payment has to be included in your debt to income ratio.
So likely if you get a home equity loan or something like a HELOC,
you're gonna have to include that payment in your debt-to-income ratio.
Which can decrease your affordability, how much home you
can't afford with your new home.
Also, of course, it includes a new level of risk.
Anytime we take on more debt, it just adds more risk to your financial situation.
So ultimately, what does increase equity?
Well, first, when you bought your home, your down payment is
instant equity that you have.
So if you put 10% down on a home, you have already 10% equity in your house.
Also, the monthly payments on your mortgage when you pay
your mortgage bill each month.
A portion of your bill goes to the principal of your mortgage
balance, meaning it pays down your mortgage balance so that is money
that you can access through equity.
Also any lump sums you make on your principal payment are
in your principal balance.
That is the equity that you have in your home, any improvements that you
make on your home, that increase the value allows you to have equity and
then also, of course, appreciation.
The average is 4% year over year historically.
Historically that's what we see appreciation run at.
And that's where a lot of people find the wealth building factors of real estate.
Okay.
So now determining how much you have what we first are looking at doing is kind of
that formula that I showed you earlier.
So let's say we have a $500,000 home value.
So that would be this whole thing right here.
Okay.
Now, if you had a $300,000 loan balance, this, that's a 60% LTV is
what a term that lenders will use.
It just means a loan to value ratio.
So in this situation, we would take the loan balance divided by the home
value to get 60% LTV Loan to Value Ratio 300,000 divided by 500,000 is 60%.
Okay?
That leaves us with 40% equity leftover $200,000 in equity.
Okay.
So we can see here, this would be the loan balance and this
would be the equity amount here.
And so a lot of people can see this number very easily on their mortgage statement.
And they may know what their home value is, but this isn't like an account.
They're, you're not gonna be able to log into an account and see,
oh, I have $200,000 in equity.
It's because we did 500,000 minus $300,000 in loan balance
shows us how much equity we have.
Okay.
Now when you're determining how, what is the market value of your home?
Cause that's gonna be the best way to figure out how much equity you have.
Usually people will run on a z estimate and his estimate
really is not a good indication.
Sometimes it can be somewhat accurate, sometimes it can be wildly incorrect.
And so I wouldn't rely on this if you're trying to run with like
accurate data that you want to use.
What I would suggest is getting an opinion of value from your
lender or your real estate agent.
They'll be able to pull up comps or comparable homes to see
what the value of your home is compared to your current market.
And that's gonna be the best way to figure out what's a realistic value
of your home a realistic market value.
Ultimately an appraisal is going to determine what your value is in your home.
So this would be a good preliminary step to get an opinion of value from
your lender or real estate agent.
But then when you do decide to move forward with something like a home
equity line of credit or some of the other options I'll show you here in a
second an appraisal is going to happen to determine how much the lender is going
to value your home and how much they'll be able to allow or lend you in equity.
Okay.
Now you do have a cap on the equity that you can borrow.
Okay?
So you can't just with most loans, you can't just pull out all of
the market value of your home.
So, for instance, like, let's say that you had a.
From this like previous scenario most lenders would not allow you
to pull out $200,000 in equity.
They want you to have a little bit of a buffer.
Otherwise, you're gonna have a hundred percent loan balance, a hundred percent
LTV, and most lenders don't like that.
Usually that cap is around 80% LTV.
So 80% of your home value is the maximum amount of loans that you can have.
They usually like you to have around a 20%.
Buffer and equity in there to lower the risk.
So here's some options that you have to pull out equity.
These are kind of the tools that you would use if you're like, I wanna
pull out equity for my first home to be able to buy another home.
This is how or these are some of the tools that you can use or have at your disposal.
So we have a home equity loan, home equity line of credit, a cash out refinance,
and then we can also sell the home.
Okay, so first let's talk about a home equity loan.
Okay?
So for a home equity loan how do we get the money?
It comes in a lump sum.
All right.
So we would get a deposit into our account for the equity
amount that we needed to draw on.
So then when we talk about the first lien, so your current mortgage
on the home, it's untouched.
So you still have your current mortgage along with your new home
equity loan, which is really nice about that, is you don't have to
refinance your first mortgage.
If you have a 3% loan right now on your first mortgage then you obviously
don't wanna refinance into a 6% rate on your, you know, a new loan.
So you get to keep the 3% or whatever your current rate is, along with a
new home equity loan that you can use.
The payment is usually fixed and often the maximum is going to be 85%.
And I'll walk you through a scenario here so you can understand a little
bit more of how you can calculate this.
Now, with a home equity line of credit, it's slightly different
because it functions more like a credit card than a lump sum.
So think of a home equity line of credit.
Like a credit card against the value or the equity of your home.
So what's really nice about this is with a home equity loan, I need to decide, okay,
I need $50,000 in equity, so I'm gonna pull that out and it gets deposited into
my account .With a HELOC, I get approved for a limit, so maybe I get approved for
a $50,000 limit, but I have a $0 balance.
And so maybe I only spend $30,000 of that.
I didn't have to take out the full amount all at once.
I got approved for a limit and I can take out as much as I want and
pay it off just like a credit card.
Okay.
The first mortgage that you have is untouched again.
Also your payment often will have an interest only period.
And also the interest rate can be variable adjustable.
So that's something to keep in mind here.
Often the maximum loans value ratio is 85% on this as well.
Now when we move over to a cash out refinance this is gonna be a lump sum.
So cash out refinance works where you're actually going to refinance
your first mortgage and get a higher balance all at the same time.
Okay?
So you'd refinance your first mortgage and also get a lump sum of cash.
At the closing table that you could then use to pay for a
new home if you wanted to.
Okay?
Now, when you do this, you do have to refinance to the
market interest rate again.
So if you had a 3% mortgage right now, a cash out refinance to 6% probably
isn't gonna be your best strategy.
It's usually gonna be better to go with a HELOC or a home
equity loan in that instance.
Now, on the flip side, let's say you have a 7% interest
rate and the market rate is 5%.
You can do a cash out refinance to both lower your interest rate and
pull out equity at the same time.
Now, when you have your payment, it's gonna be the same
thing as a mortgage payment.
Usually gonna be fixed for most people.
And the common maximum loan to value ratio is 80%.
And then when you sell, obviously slightly different you're gonna
get a lump sum of cash, okay?
Whatever equity you have in there, keep in mind that, you know, you will
often have, you know, realtor fees and taxes and titled and things like that.
There obviously is no payment.
Your first mortgage does get paid off, and then you have full access to those funds
minus any closing costs that you have.
Okay, let's run through an example.
Let's say you have a $350,000 home.
That's what your home is currently worth, and you owe
$200,000 on it in your mortgage.
Okay?
So let's say we wanted to get a home equity line of credit because
we want to buy another property.
We need money for the down payment and closing costs, but
we don't have it right now.
You know, maybe in savings or we don't wanna touch our savings.
We're gonna use a home equity line of credit to buy a new home.
Okay, so with that, we need to always have 15% equity in our home.
That's 85% LTV, right?
100% minus 85% is 15% equity.
Okay?
So what we're first going to do is take the market value of our home, $350,000
x 0.85, that's gonna give us the maximum amount of total loan that we can have
possible that gives us $287,500 as the maximum total loan we can possibly have.
That's gonna be our first mortgage.
Plus our HELOC cannot exceed that amount.
Okay, so what we're then going to do is run some math with that number.
Now I have a slight little error here, so I'm gonna correct
these eights instead of nines.
So we're gonna take 287, 500, and we're going to bring that over here.
Okay?
So we take 287,500 minus 200,000, which is our current loan balance,
and that's gonna give us the maximum HELOC that we can have.
Okay?
So that would be 87,000.
So 87,500 is the maximum HELOC that we could get.
So what we would do with this HELOC is we'd move forward with it.
We'd get approved for $87,500 as the maximum limit.
Now, once we get approved for it, our balance is $0.
We do not have to take any money out until we're ready.
Okay, so now let's say we buy a new home.
We wanna buy a new home worth $400,000.
Okay?
Now the down payment, let's say is 20,000, and closing costs are 10,000.
So we only need to draw $30,000 for the down payment and closing
costs on the HELOC, even though we were approved up to $87,500.
Okay, so I hope this makes sense.
It works very similarly to a credit card.
We got approved for a limit based on the maximum LTV that we could have.
We removed our loan balance so we could see the maximum HELOC that we
could get, and then from there we only needed to draw $30,000 on it.
Now, what's nice about this is we still have, you know,
just over $57,000 remaining.
And our HELOC that we can use so that HELOC is still open.
It still functions just like a credit card.
So of course over time we want to pay that down, but we could also look at
using that for renovation if we needed to.
For refurnishing, the new house for adding, you know, painting, fixtures,
landscaping, whatever you need you can use with that HELOC as well.
Okay, so when you're buying another property it's easy to buy a new
personal home investment property.
Or a second home with the equity that you already have.
Something that you do want to keep in mind though, is if you're not
selling your current home you're gonna have to be able to keep both of the
debt-to-income or the both of the mortgage payments in your debt-to-income ratio
which can change your affordability.
So what a lot of people will do is they'll take their first home and
if they're not gonna sell it, they usually rent it out so you can take
the home that you're living in.
Rent it out.
Use the equity that you have to buy a new home that we are getting, someone
else is paying this mortgage for you and including, you know that HELOC or home
equity loan or cash out refi, whatever it was, they're paying that for you.
You use the equity to buy a new home and then because you have
a renter in there that helps lower your debt-to-income ratio.
So this is extremely common.
And then there are a lot of other people who wanna sell and
they don't wanna manage a rental property and they'll just sell it.
Perfectly fine, but these are two extremely common scenarios.
So here's how to do it.
One is to schedule a call with us to talk through your options so you can go
to WintheHouseYouLove.com and schedule a call with somebody on our team.
So we have mortgage advisors license.
in all 50 states who would be happy to help you walk through these different
options and see what you could do with your equity and get you approved
for some of these different options.
So we primarily work with cash out refis and home equity lines of credit
for people to be able to do this.
Okay.
Then what you wanna do is pull out the equity in your home, and then finally you
can use it on your new home purchase to cover your down payment or closing costs.
Or maybe you just want to pull out money to pay down.
You know, maybe you're not buying a new house.
Maybe you want to just pay down high interest credit cards
or student loans or a car.
Perfectly fine.
And people do that all of the time.
So buying another home with equity is why leverage exists inside of real estate.
It's how people use real estate to help them grow their
portfolio and their assets.
And maybe you're not even trying to go super you know, super investment mode.
That's perfectly fine.
A lot of people just use it as a stepping stone approach to be able to buy a new
home without digging into their savings.
So if you want to get pre-approved, if you wanna learn more, if you have.
Questions about buying your first home or a another home?
You can go to WintheHouseYouLove.com and we'd be happy to help.