Refinancing One’s Home to Buy Another: Different ways in which to use accumulated equity

There are many reasons for people to refinance an existing mortgage. It may be that they wish to take advantage of lower interest rates to reduce their monthly payments. It could be that they need cash to consolidate debt, such as credit cards.

With the unprecedented run-up in the value of homes around the country in recent years, many people have a great deal more equity in their property than they ever dreamed of. Equity is the difference between what you owe on your property and what your property is worth in today’s market. The question for many homeowners is how to best utilize this equity.

One answer is to use all or part of the equity in one piece of property as a down payment on another piece of property. This second property could be a vacation home, or a rental property, or it could even be something that you plan to give to a child as a wedding or other gift. The point is, buying this second property in whole or in part with the equity from another property can be an excellent way to finance a second property.

If interest rates have gone down since you took out your first mortgage on your primary property then a mortgage refinance may be your best bet. When you refinance a first mortgage you simply replace one loan with another. If the new loan is for a greater amount than the original loan (thanks to the equity you have built up) then the difference between the two loans is the cash that is put into your pocket and which may be used as a down payment on another property.

If interest rates have not gone down and you want to keep your low-interest first mortgage just as it is, then you may wish to consider taking out an equity loan, also known as a 2nd mortgage.

In either event there are distinct advantages to using the equity from one property as the down payment on a second property. First, since the bulk of your equity has probably come simply from an increase in the value of your first property, you may look upon this as “found” money – and the idea of using “found money” to buy a second property can be very appealing.

But more than that, the equity cash that you are using for the down payment on the second property will most likely be tax deductible, which may lower the cost of acquiring the new property considerably.

Using equity funding for the purchase of new property is an idea that should appeal to many homeowners who have discovered just how much equity they suddenly have in their home and are looking for a productive way to use it.