Q. I need to relocate for a job but I want to keep my shore home which I own outright, worth $220,000. I was thinking of taking a HELOC for about $100,000 to use as down payment on the new condo priced at $239,000. Is this a good idea ? Will I be able to qualify for a mortgage with an outstanding HELOC? And am I correct in thinking that with a HELOC, I won’t have to pay anything monthly if I don’t want to? I plan to sell the condo in about four to seven years so I’d love to sell the condo and pay the HELOC back in one lump sum.
— On the move
A. Congratulations on your new job, but boy, you’re talking about risk with these two properties.
First, you should determine if it’s worth buying or renting in your new location.
The transaction costs of a real estate purchase are significant, they’re difficult to avoid and if incurred after a short period of ownership, can be disastrous, said Peter McKenna, a certified financial planner with Highland Financial in Riverdale.
The real estate commissions alone can be 5 to 6 percent of the value, he said.
“Homes are a very personal thing, what is appealing to you may not have universal appeal and you could find it difficult to sell when needed without giving price concessions,” McKenna said. “With a four to seven year timeframe, there is the possibility of market price improvement or decline, but you need to be able to wait out a decline if it occurs.”
McKenna said it’s critical to consider if you have to buy, or if it would be safer to rent first. Then if everything looks good after a year, you could consider a purchase.
In that first year, McKenna said, you can acclimate to the area, see what neighborhoods are good to live in and make sure you like your new job enough to stay there.
“Many employees that transfer or move for a job find that things don’t work out and in a worst case scenario, you could find yourself unemployed and owning two pieces of real estate,” McKenna said.
He said for your time horizon, the risk is just too great.
If you feel you really have to buy, McKenna said, a home equity line of credit (HELOC) could be a way to monetize some of your current home equity in order to make the new down payment.
He said the mortgage underwriting process will consider your income relative to the principal, interest, taxes and insurance (PITI) on both properties as well as any other debt you have.
If your income is high enough to make the bank comfortable with both the HELOC and the mortgage, you need to look at your budget and confirm that you are comfortable having that much of your income pre-destined for fixed expenses, he said.
McKenna recommends you have an emergency fund with six to nine months of expenses at a minimum to ensure that you will be okay if something should happen to your income.
On to your question about HELOC payments.
Many HELOCs have interest-only payments at first so you may not have to make principal payments at the outset, McKenna said.
“You and the banks should consider if you can afford the loans when the principal payback, called amortization, begins,” he said. “Many HELOCs are set at floating rates you should also consider what happens to your payments when interest rates go up.”
Lastly, you need to consider whether owning this much real estate is prudent for your circumstances.
You are talking about two properties with combined value of roughly $459,000. How does that asset value compare to your other investments and your earnings?
“While a 10 percent increase in real estate value can provide a nice pop, a similar decrease on both properties could be quite painful,” McKenna said. “Many property values fell 20 percent or more from the 2006 peaks to the troughs in 2009 and 2010.”
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