Dear MarketWatch,

I bought a house in my home country seven years ago. I bought the house using an FHA loan and down payment assistance. Several years ago I moved out of state and kept the house as an income property. My intention was and always has been to keep this house permanently and make it part of my retirement plan (hopefully with a few more in the future). I have a lot of equity in the house, as the house has increased in value since I bought (it is now worth about double what I owe on it).

I am writing to you because I am wondering if it is a good option for me to take home equity to use for a down payment on my next home. My credit is around 750, I have no debt other than this mortgage and a small car payment that will be paid off in a year.

However, my savings are in a sorry state. Two moves out of state in recent years, the loss of a job (and the resulting drop in pay) and other personal medical expenses have given this account a real blow. I am currently a renter and would like to buy my next home as I see this as another long term investment not only for my financial well-being but also for my mental / emotional well-being.

I have kept the same tenant in the house since I moved, and the property money is flowing well. The mortgage is currently 4.75% and the down payment assistance received was $ 7,500. If I take equity out I would have to pay that back (which is understandable), so that’s something to consider as well. I earn a decent living and have a small budget to speed up my savings. That being said, these days saving 20% ​​on the down payment can still take a while.

Can you offer any advice?

Thank you,

Hungry house

Dear hungry,

First off, I want to congratulate you on coming out of such a tough string of setbacks in what appears to be a pretty solid financial situation. You can clearly see the value of building an emergency fund for that rare rainy day, week or month.

That’s why my next tip might disappoint you: I think it’s in your best interests not to buy a home just yet. And before you log me out – I get it, nobody likes to be told no – I think you should reconsider everything you just went through.

You’ve managed to get out of job loss, multiple moves, and medical emergencies without debt because you did what so many Americans don’t or can’t do: you saved your money. Replenishing those savings should be your goal for now.

Here’s why: Say you had to cash out the equity in your investment property, either through a home equity line of credit refinance, then the bottom fell. From what you’ve told me, you don’t have a lot of savings in your personal accounts. If you’ve used all of the equity you took out of your investment property for the down payment on your new home, you won’t have that resource to rely on.

Imagine what would happen next. You could fall behind on one or both of your mortgages, depending on how much money you make from your rental income. It would threaten your home, your credit and your emotional well-being. You might be forced to sell your first home, but then you are missing out on financial opportunities for your retirement.

Cash-out refinances and HELOCs are not only more difficult to obtain for investment properties, but also more expensive.

That’s not to say that you should never take some of the equity out of that first home to buy a second. However, keep in mind that cash refinances and HELOCs are not only more difficult to obtain for investment property, but also more expensive. You will be charged higher interest than you would get for a house you plan to live in, and it can come with high fees.

You also assume that owning a home is the best financial decision. It is possible, but it is not cheap. Of course, when you own a home, you reap the long-term benefits of the growing value of that investment, not to mention the perks that come with not owning a home. But you are also responsible for a host of other expenses, as you are no doubt aware, that offset some of these benefits. In many parts of the country, leasing and investing your savings in other vehicles such as stocks or mutual funds can provide a much better financial return than owning a home.

Take the time to replenish your savings. You don’t necessarily need the equivalent of a 20% down payment saved, but at least enough to cover three to six months of your worst-case expenses. At this point, do the math to make sure that home ownership is the best financial route to take. If so, consult a financial advisor or loan officer to determine your best course of action to refinance the mortgage on your investment property and take out a new one – a lender may be willing to make a deal for you. .

Good luck with this trip – based on how you’ve been doing so far, I’m confident you’ll come out stronger on the other side of this.

“The Big Move” is a MarketWatch column that examines the ins and outs of real estate, from finding a new home to applying for a mortgage.

Have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at [email protected]