20 Oct I’m buying a vacation home. How should I pay for it?

Q. I am thinking of buying a vacation cabin worth about $200,000. I have $100,000 in cash and a $100,000 home equity line on my first home. I have good credit and can probably get a mortgage. What’s the best way to do this?
— Buyer, maybe

A. There are multiple options that you have for purchasing a vacation cabin.

Without knowing some more important details about your financial life, such as your age, income and other assets, it’s hard to know what the best choice will be for you.

But here are some things to consider.

In general, using all your cash and the home equity line to buy the cabin outright would not be recommended, said Ken Van Leeuwen, a certified financial planner with Van Leeuwen & Company in Princeton.

“Using all your cash will deplete the liquidity that you currently have, and instead, redirect that liquidity into a non-working, illiquid asset,” he said.

It is important to consider the alternative in this case, which would be using a portion of the cash as a down payment and obtaining a mortgage, he said. This allows you to maintain your liquidity and presents a unique opportunity to grow the remaining cash through liquid investments, if your risk tolerance and time horizon allows you to do so, he said.

And with interest rates still historically low, financing the purchase and investing the remaining cash may be a better option for you, he said.

Van Leeuwen said there are potential risks to using the home equity line rather than a mortgage.

“With interest rates remaining at historical lows, and a reasonable expectation that they will rise in the future, a home equity loan presents some risks because their rates generally fluctuate with changes in interest rates,” he said. “A fixed-rate mortgage eliminates the risk associated with rising interest rates by allowing you to lock in a low mortgage rate now.”

Good luck with your vacation home.

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This story was originally published on Oct. 20, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.