Use of equity in home

[DesertCactus]

Hello to all.

 

We have a home with about 100K of equity. We have about 20K in credit card debt. We want to move from this location as it is a very long commute for my spouse to work each day. (it was my home before we married) We were thinking about refinancing cash out and using the cash to pay off credit card debt and the remainder to put a down payment on a new home in the area where we want to move. We would then rent this house out. The rental prices in our area, on the low end, (being realistic, not pie in the sky) would more than cover the new note and net about $400 per month.

 

Another important factor is the refinancing would be done with myself and my adult son who lives here now. When we moved, he would move too. So at this time, it would not be considered an investment property. The new home would be purchased by my husband and myself. I am not sure if that would affect the way the mortgage company would view this home purchase (investment or homestead) I suppose this part is certainly a mortgage question.

 

We have never been landlords but our realtor (good friend) has about 11 investment/rental properties and is obviously a big proponent of this idea.

 

So my question is: Does it make sense financially to do this or should we just sell, pay the real estate commission, pay off the debt, and put more down on the new home purchase or otherwise invest the rest?

 

I know more details might be needed, but in general, is this a silly idea or a sound one? I am 50. My husband is 39 if that factors into anything. He has a very secure job and is has just been promoted. I am a stay at home mom. We are in the Houston, Texas area.

[Kevin20]

Well look. Mathematically, counting things like interest rates and tax deductions, that can make sense. If all goes well you can end up with greater cash flow and higher net worth. I wouldn't even ask for details, because things should work out well if you successfully rent it, and things will blow up in your face if you do not.

 

BUT -- you need to appreciate the risks involved. As it is you have significant ownership in the home you live in. What you're proposing is to trade away what ownership and security you have in exchange for more debt that holds your home as collateral.

 

There is no right or wrong answer, it's just a balance of risk and reward. But, where many people have badly screwed up in recent years is to ignore the risk in real estate values, as well as the all-in full costs of home ownership (property tax, any home-owner association fees, paying utility bills at times for a house you don't live in etc., those all count too.)

 

Your husband's employment is not as secure as you think. What if he has a stroke tomorrow and can no longer function in the workplace? That happens to people (among a billion other possibilities). Point being, I'd encourage you to really think about all the relevant risks.

 

If you do buy another house, you likely need to get more life insurance on at least the husband and probably yourself. Because we're all mortal and might die any day. If you're not wiling to do that, don't buy another house.

 

So not to sound too much like a nag but that's about the size of it -- could be a great idea, but you need to think soberly and analytically about the risks, costs, and potential downsides.

Edited October 17, 2012 by Kevin20