How To Use Your Primary Residence To Buy A Second Home
Here’s a tip for buying a second home that I came across this week in a closing that I did over in Tampa.
So, they had already been living in their main home for a good while with a lot of equity in it.
They took out a Home Equity Line of Credit and used the funds to buy a second home closer to the beach.
I normally wouldn’t have even known what they were going to do with it, but when we go to the page they had to sign with the Occupancy Affidavit, things got a little sticky.
Now, in case you’re not familiar with the Occupancy Affidavit, it’s a form where that states whether the property will be their primary residence or investment property.
Why Does It Matter If It’s A Primary Residence or Investment Property?
After they sign it, I have the signers take an oath that the information is true and correct. Then I notarize the document.
So, here’s where things took a minute to get sorted out. Because the Occupancy Affidavit stated that the property they were refinancing was their primary residence.
And they paused and read it again. Then said, “No, but it’s not our primary home. It’s a second home.”
At this point, I was confused. The property address where I met them was their residence. And it was the property that was being used as collateral for the loan.
Then they explained that they were taking out the HELOC (Home Equity Line of Credit) and using the cash out to buy this second home.
That’s when I finally understood what was going on.
Using Their Primary Residence To Purchase A Second Home
I thought that was an interesting strategy for getting the benefits of refinancing on a primary home since technically they were taking out the loan against their primary residence.
Usually, when I see people buying a second home or investment property, they use the second home as collateral, where the interest rates are a bit higher.
Now, I don’t know all the details and didn’t ask, but I thought this was a brilliant stroke of genius on the part of the mortgage broker that helped him with the loan process.
In the end, they understood that, yes, it was their primary residence that they were taking the HELOC (Home Equity Line of Credit) out on and using as collateral for the loan.
Since it was a cash-out refinance, they were getting the funds wired into their account and could then use it to do whatever they wanted to with it.
Obviously, I’m no lawyer, so I don’t all the legalities behind this. Nor am I a financial advisor or mortgage broker, so I can’t recommend you do the same.
But it’s definitely an idea worth talking about with your mortgage broker or loan officer if you’re looking to buy a home in this crazy market.
Especially, if you have a lot of equity in your current home.
3 Steps To Buying A Second Home With Your Primary Residence
Let’s break this down as simply as possible…and then talk about what you can do with two homes.
Step 1: Cash Out The Equity In Your Primary Residence
Get a cash-out refinance or HELOC (Home Equity Line of Credit) to get the benefits of using your primary residence
Step 2: Buy The Second Home With The Liquid Equity From Your Original Home
Use the cash out to buy a second home or make a large down payment
Step 3: Congratulations Because You Now Own Two Homes
Enjoy the benefits of owning 2 homes, and take advantage of writing off the tax breaks you get from an investment property.
I guess that was really only two steps since enjoying your new homes wouldn’t actually be considered a step.
But it would sound too easy if I said this was only a 2-step process for buying a second home with the equity from your primary residence.
So, what can you do with two properties?
I don’t knooooow…
Idea #1: Use one of them as a weekend home or temporary getaway.
Idea #2: Rent one of them out as a short-term rental (like AirB&B) when you’re not using it. That way you can just block out the time you actually want to use it. Use the extra income to pay off the mortgage.
Idea #3: Or move permanently into the second home. If you like it better than the first, go ahead sell your old home.
Since you don’t have to worry about moving, you won’t be under any rush or pressure to sell it.
Bonus Idea: Here’s a bonus idea for you…
Later down the line, once you’ve paid off some of the loan and built equity back up, you can use the second home in a 1031 exchange to buy a third (even bigger and better house) without having to worry about capital gain taxes.
The possibilities are endless.
Let me know what you thought of this strategy in the comments below.
