Using a 2nd Mortgage to Become an Investment Property Owner
If you were a homeowner when COVID hit, you probably refinanced to a great, low rate. It certainly seems that almost every homeowner did. Consequently, there are a lot of homeowners on the market who are finding it difficult to give up their current interest rate by selling and taking out a new mortgage on the next home. But wait… What if you didn’t give up your current interest rate? You can still buy your next home, the home of your dreams, and use your low interest rate to build wealth. How, you ask? With the help of a second mortgage.
In this article, we examine the opportunity provided by second mortgages to turn your current home into an investment property. This allows you to utilize the considerable equity presented by today’s market to make gains in real estate.
What is a Second Mortgage?
First, let’s talk about what a second mortgage is. Second mortgages use the equity in your home as collateral for a new loan. Equity is the difference between what your home is worth and your principal balance. So, for example, if you own a home that is currently worth $400,000 but you owe $300,000 on it, you have $100,000 in equity. A second mortgage allows you to borrow a percentage of that equity, typically up to 80%, giving you $80,000 to spend in this example.
So what do you do with 80% of your home’s equity? Use it as the down payment on the next one! While most people use the cash equity from the sale of their home as a down payment, you can borrow it.
Prime Time for Equity and Income
In today’s market, available equity and average rent prices make it especially advantageous to take out a second mortgage and possess an investment property.
As mentioned in the introduction, few homeowners are putting their homes on the market. The result is extremely limited inventory, leaving more buyers than sellers in the market. And when there are more buyers than sellers, home prices rise. The higher home prices rise, the more equity you have in your home. The more equity you have in your home, the more you can borrow using a second mortgage.
Rents have risen exponentially since COVID. A two-bedroom apartment easily goes for over $2,000 per month. Meanwhile, if you are a 2-bedroom condo owner who refinanced during COVID, your monthly payment could just as easily be in the low to mid $1,000s. So, because of your low interest rate, you are in a significantly favorable position to earn serious investment income.
Hold Onto It
A COVID-era mortgage interest rate is highly valuable. So hold onto it. But not at the sacrifice of moving into your next home! Consider using your low interest rate to build long-term wealth and capitalize on the high equity in today’s market through a second mortgage as the way to get there. If you’d like to start a discussion about second mortgages and investment properties with a mortgage banker, get in touch!