Saving cash for the next down payment versus borrowing against the house I just moved out of

Question

First house is bought and I'm living in it, so the next decision is a year out but I want to understand it now. To buy rung two I need a down payment. Two ways I see people get it.

Save it from income. Slow, boring, no new debt. In my case about 14 months of putting aside 1,100 a month to have enough for a low down payment plus closing costs plus a small reserve. That keeps the converted house clean, one loan on it, and the rent above the payment by a comfortable margin.

Or borrow against the first house once it has some equity. A home equity line, drawn only when I'm under contract on the next one. Faster, and it uses value that's already sitting there. The cost is a second payment on the rental, which eats the margin I was counting on, and the line's rate can move, and the payment shows up in my ratio when I apply for the next mortgage. My lender said whether they count the full line or only the drawn balance is a lender-by-lender thing and I should get it in writing, which surprised me.

I can see either being right depending on how patient a person is. I don't have a feel yet for which one people regret. What did rung two actually get funded with?

sonia_alvarez · Answer

Your lender is right that the treatment varies. Some underwriters use the payment on the drawn balance, some use a calculated payment on the full line whether you've touched it or not, and a few won't let you open a new line at all in the weeks before closing without re-underwriting. Also worth asking specifically: some programs restrict borrowed funds as a down payment source and want the money seasoned in your account for a set period. Get both answers from the same person in writing, because the loan officer and the underwriter don't always agree.

tylerbrooks9 · Answer

Cash. 14 months of 1,100 is not a punishment, it's the strategy working at its own speed. A line on the rental turns a house that pays you into a house that mostly pays a bank, and you did the year of living there specifically so it would pay you.

brandonlee36 · Answer

I used a line for rung three and it was fine, with one caveat. I drew 22k, paid it back over about two years from the rents, and the whole time my cushion on that house was near zero. One roof issue and I'd have been drawing on the line to pay for repairs on the house securing the line. If you go that route, size the draw so the rental still clears the combined payments with 200 a month of slack.

renee_dubois · Answer

@thicket the slack number is the useful part of this thread. On my small multifamily I use 8 percent of gross rent for repairs and it's still light in the years something big goes. @quill, run the borrowed version with the repair reserve funded rather than assumed, and if it still clears, the line is a tool. If it only clears because you left repairs at zero, you're just borrowing against a house to be broke faster.

kevin_lombard · Answer

So the line is only really cheap while nothing breaks? That reframes it for me, thanks @cairn.

Saving cash for the next down payment versus borrowing against the house I just moved out of

5 replies