I have an opportunity to buy property. Should I rob savings or borrow with a home equity loan?

Answer 1

There are two issues here: (1) Why are you buying the property? and (2) How is the best way to buy the property? I will answer (2) first since that seems to be what you are asking.

Usually the best way to buy property is to take out some mortage, but use enough of your savings to put a large down-payment on the property so that you get a very favorable rate. In most circumstances, 20% down will get you a much better rate than 10% or less. Beyond 20% down, you usually don't get that much of a better deal, but you need to negotiate this with the bank and consider your circumstances.

You also should consider using savings in another way: suppose you are considering a fixed-rate vs. variable-rate mortgage. If you think rates are going to go up, it's usually best to get a fixed-rate, even though the rates are higher. But if you have a substantial chunk of savings you are considering spending on the property, then you might want to get a variable-rate mortgage to get the low rate for initial years. Then, if the rate goes up, you can throw your savings at it to pay it off quickly. Now, this is a good tactic if your savings are in cash, but if you have your savings invested, keep in mind that investment returns are usually higher when mortgage rates are higher.

That brings up the last question: how available is your money? Are you going to have to sell stocks or mutual funds, and end up with realized capital gains that you would have to pay tax on? Or do you just have cash in a bank account that you can fork out freely?

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Now, turning to question (1): why are you buying this property? Are you going to be able to generate money by renting it? Are you going to live in it? Use it for something productive? Do you have reason to believe the property value will increase? You should always keep these questions in the back of your mind--they will guide and influence your decisions on HOW you choose to buy the property, if you choose to buy it.

Answer 2

Assuming you have weighed the pros and cons of the opportunity and made a good decision to buy, you will want to buy at the least cost of the money.

1) If your savings is earning a lower percent than the percent charged by your home equity loan, use your savings. If the home equity loan rate is lower than the rate earned on savings, use the home equity loan.

2) However, keep in mind that #1 is predicated on your having made a sound decision to buy the property, since using the home equity loan carries more risk.

If your decision to buy was a bad decision, you could end up losing the property you are buying plus also losing your home if you are unable to pay off the home equity loan. By using money from savings, if the decision was bad, you only lose your savings and not your home.

Answer 3

Neither. Instead, get a HELOC. This is a revolving line of credit secured by the equity in your house. Depending on the state you live in you can get up to 90% of appraised value. The beauty of a HELOC instead of a regular home equity loan is that the interest is calculated differently. The federal government has special laws that provide incentives for lenders to write 30 year mortgages. That's why when you start out in a mortgage (or a home equity loan) the majority of your payments for the first seven years are almost all interest and very little applied to principle. HELOCs are calculated differently. The rates are typically prime -.1%. The interest on say a $25,000 balance is about $130 per month right now. If you pay $1,000 per month on a HELOC, $870 of that goes to principal and $130 goes to interest. That same payment on a mortgage or a home equity loan reverses those numbers - most of what you pay is pure profit for the bank! And the interest you do pay is tax deductible. Don't touch your 401k. That's a bad habit to develop. The next time it'll be easier to tap into it... You get my drift.

Answer 4

Property has one of the lowest returns on investment in the world. By the time you pay taxes and make repairs, you are poor if you do all cash. The only way to make good money in real estate is to borrow the money until the property "pays for itself"

I cannot emphasise more, Borrow money.