Has anyone used the equity in their first home to buy their second home? I think I have at least $100k if not $120k in equity in my first home but it was a starter home and we’re quickly outgrowing it. Home prices are of course insane and I like the idea of holding onto my first house as a rental (my brother has two rental properties and will help me). Any insights/thoughts?

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This is a common strategy, not reinventing the wheel here. If you want more in depth responses go on bigger pockets and watch a few of their podcasts on this topic.

Overall if you want to pull out the equity from your first home, the two most common options are a cash out refinance or using a HELOC.

A cash out refi will change the entire mortgage of the loan. You are basically taking out a new mortgage to pay out the old mortgage and keeping the cash the remains, usually up to 75 - 80% of the LTV of the property. If you want some numbers on it. You have an assessed market value of 500k, 80% LTV would be 400k. If you have a remaining mortgage of 200k, you can get a cash out refi to pay off that 200k and you keep the remaining 200k minus closing costs.

If you use a HELOC you are basically adding a 2nd lien on the property. The amount you can take out will vary depending on the lender but some allow you to take up to 100% LTV, on the property. Advantages are you get to keep your lower rate mortgage, and HELOCs usually only require to pay interest for a certain draw period (most typically 5-7 years) and ballon’s at the end. That said HELOC tend to be variable rate (you can find fix rate out there), have higher rates than other loans, and some have clauses that you can’t use the money to buy additional property (even though the majority or people don’t respect this and there is no one checking what you do with the funds once the credit line is yours).

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I’ll also add, at the end of the day both options work, you have model out what’s best for you, and if the property you are going to rent is going to cash flow after you use either option.

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Following, as I’m looking to do the same this spring.

Following, as spouse and I are looking to do something similar.

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