DOWNSIZE OR UPSIZE: With a Home Equity Line of Credit

Cambridge Trust

July 26, 2018

Residential Lending

For many people on the path to buying a new home, securing a mortgage is the first logical step. But if you’re already a homeowner with existing equity, a first mortgage might be a step too far. 

Equity is the difference between the amount owed to your mortgage company and the value of your home. And if you have equity, chances are you also have more options available to you for your next home purchase than just a mortgage. For example, you might consider a Home Equity Loan, which allows you to leverage the value of your property in order to secure a lump sum advance, which will be paid back with fixed interest every month. Perhaps even more practical for current homeowners is a Home Equity Line of Credit. A Home Equity Line of Credit is like a flexible home equity loan that provides borrowers with a reserve of funds to draw on as needed. You only pay variable interest on the amount you use, as you use it.Typically, Home Equity Lines of Credit are used to pay for renovations, home repairs, vacations, education, and business investments, or to consolidate debt. But for homeowners looking to upsize or downsize, a Home Equity Line of Credit can be just the right-size solution. Consider the following examples.

If you’re looking to upsize: Maybe you’re a young couple who purchased your home about five years ago. Property values have gone up, and now you have some real equity in it. You love your home and the interest rate you have on it. But the house is just too small for your growing family. A Home Equity Line of Credit can give you the funds you need to make your home work for you: expand the kitchen, add a nursery, finish the basement, get the pool you’ve always wanted. You only pay interest on the money you use. And because now you don’t have to buy a new home, you save on closing costs, mortgage fees, realtor commissions, and the expense of moving, too. Most importantly, you get to grow as a family in the home you love. 

If you’re looking to downsize: Perhaps your kids have grown up and moved out, leaving you with more house than you need. You want to downsize to a luxury condo by the beach, but you’ll need to sell your home for top dollar to make it happen. A Home Equity Line of Credit can give you the money you need to buy the dream condo now and renovate your current home to sell for top dollar later. For example, if you take out a home equity line for $600,000, you can buy the condo in cash for $400,000, then use the remaining $200,000 to fix up your house. When you sell your newly-renovated home for maximum price, you can pay off your loan and pocket a profit. Best of all, you’ll own your new condo free and clear – all without having to pay the closing costs and interest rates of a new mortgage.

This article is for informational purposes only and should not be construed as investment or legal advice.