Refi and Buy: 3 Dangers of Using Your Home Equity for a New Property Purchase

Home Purchase in WayzataApplying for a cash-out refinancing to finance the purchase of a second home has been more popular than ever. As home values increase and interest rates head south, many Minnesotans are taking advantage of the situation.

After all, lenders are more likely to provide you better refi terms because using your home equity means having more skin in the game.

This strategy is not all roses, however. Many experts advise against this move, especially when:

You May Increase Your Monthly Repayments

Cashing out some equity on your primary property to buy one of the desirable Wayzata, MN homes for sale on the market may increase your debt-to-income ratio. Unless you intend to purchase your second house 100%, applying for a second mortgage to cover the remaining cost of the property would mean additional monthly repayments on your plate.

Even if you manage to lower your repayments on your primary mortgage, maintaining two mortgages at the same time boosts your risk of foreclosure on any of both loans.

You May Hurt Your Credit

Some experts say that buying another property while in the process of a refi may have a great impact on your credit. Once your credit is affected, your ability to finance or refinance your mortgage may change.

The best thing you could do is to talk to the lender processing your refi. Then, you would learn the possible credit implications of your new home purchase, if any.

You Risk Putting Too Many Eggs in the Same Basket

Financial advisers cringe at the idea of investing too much in real estate. The housing boom may be hot, but once it suddenly cools down, you may end up being an owner of underwater mortgages.

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There’s nothing wrong in having two houses at the same time — as long as you diversify your investment portfolio to protect your wealth should the real estate market underperforms.

Using your current’s home value to purchase another property could either be the best or the worst financial decision. You must exercise your due diligence to calculate the risks you’re taking.