Getting a Home Equity Loan on (or for) a Non Owner Occupied Property
So you live in a property and want to buy a larger one, but you want to use your existing property as a rental. This is common for people who buy a townhouse when they are single but then want to graduate to a house when they get married or start making more money. They view their townhouse as a potential source of income. Being a landlord isn’t for everybody, but if you have a property in the right area, you can turn that first home you bought into a real moneymaker, both for today and after you retire.
Let’s say you buy a townhouse for a purchase price of $150,000. You put $30,000 down, and you live there for five years. Then, you put the townhouse up for rent and buy a single-family home with another mortgage. You use the rent from the townhouse to pay for its mortgage as well as bring in a small profit, and five more years go by. Let’s say you have $75,000 equity in the townhouse but only about $65,000 equity in your single-family house. Its purchase price was $250,000, and you put $50,000 down. However, the first few years of your mortgage payments don’t generally result in significant equity, because the early payments mostly go to pay for the interest on the loan. After time goes by, the payments start to pay for more and more of your principal. Both of your notes are closed, so you can’t pay ahead to trim your principal more quickly without incurring a significant penalty.
Non Owner Occupied home equity line of credit
Then your sister comes to you and asks to borrow $30,000 for legal fees, or for an operation, or some other catastrophe. Or your car that you’ve driven since you were 18 finally gasps its last breath, and you need to buy another one. While most people would take out a car note, it is worth taking a look at the difference in interest rates and closing costs between the equity loan and the car loan. However, you don’t have room in the loan on your single family house to ask for a $30,000 loan. Home equity loans, even on primary residences, aren’t usually available above 75 to 80 percent LTV (loan to value ratio). So that $250,000 home will only bring you $200,000 in equity loans. You only have $65,000 in equity, and that first $50,000 is unavailable — so you could only ask for $15,000. However, with your townhouse, you could take up to $45,000 out. The value is $150,000, which means that you could ask for an equity loan that would leave as little as $30,000 in equity. You have $75,000 in equity, giving you a maximum request of $45,000.
Well, it’s not quite that simple. LTV requirements are different when the property is not owner occupied. You’re going to top out at about 70 percent in most cases, so the $150,000 home is only good for about $105,000 in equity and mortgage principal. You still owe $75,000, so you could go up by $30,000 and max the equity credit out.
Before you run down to the bank that has your first loan and start filling out equity loan paperwork, though, there are a few more things to consider. After you sign the paperwork, you will owe the bank (or other lender, if you refinance elsewhere) more money. Your monthly payments will go up, or you will have a mortgage longer now. This is a natural result of asking for more credit. So make sure that you can afford the change that you are about to take on.
Also, home equity loans aren’t something to consider frivolously. If you are snowed in with credit card debt and are paying high interest rates, it is something worth considering to roll that debt into a home equity loan. However, if you really want a snowmobile, you can take out a home equity loan for that, but it might be just as rewarding to wait until you’ve saved up enough money on it. You don’t want to risk losing your house by taking out home equity loans that you do not really need.
If you’ve concluded that a home equity loan is worth pursuing for a non owner occupied house, get in touch with one of our financing specialists at Amansad Financial. We know how these processes work, and we can walk you through it step by step. Having a qualified professional by your side makes these transactions go much more smoothly.
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