Paying off your house is a great feeling. You make that last payment and can cross off that monthly payment off your list. Now you have equity in your home, and all that equity might get you thinking, "Can I get a mortgage on a house I already own?"
Can I get a mortgage on a house I already own?
Dave Ramsey might have a cow if he finds out you're getting a mortgage on a house you already own, but there are many reasons why it could actually be a good idea.
For an Investment Property
Cut out the closing costs and much of the closing wait time by leveraging your assets and buying your house with cash. Yes, you read that correctly. Buying your house with cash (especially during a time like this when interest rates are preventing others from putting in an offer) is a great way to rise to the top where the great real estate deals are happening.
Many people do this by taking money out of retirement or other assets, using it to buy a house, and then getting a mortgage on the property. The lender you work with when getting a mortgage on the backend is key, as it can be a bit more complicated than doing it on the front end.
Making Some Renovations and Repairs
Maybe you paid off your house, but the roof started leaking after a nasty winter and now you must cough up $10,000 to repair it. While you could take out a regular old loan, the cheaper option might be to take out a mortgage on your house.
Short term loans often come with a high interest rate that adds up quickly. Having a home equity line of credit may be the best option for going into as little debt as possible.
With a home equity line of credit (HELOC), your lender will give you a line of credit based on your credit score and the equity in your house. A HELOC acts much like a credit card: your lender gives you one or multiple lines of credit, assigns you a max limit, and you can withdraw as much as you want up to that amount, paying monthly payments along the way.
Occasionally, you need a large chunk of money to pay off a debt or make a large purchase. In situations like that, home equity loans such as a cash-out refinance might be your best option—as far as loans go.
Basically, your home gets refinanced with the equity available, paying off your current mortgage and freeing up the capital for you to use. Sound confusing? Here's a small example.
Susan and Fred have $50,000 equity in their home, and still owe about $120,000 on their house. They want to invest in a property down the road. So they take out a home equity loan against their existing mortgage, resetting their mortgage amount to $170,000 and freeing up the $50,000.
Another way to get a mortgage on a house you already own is by taking out a reverse mortgage. Only people 62 years old and older can take out this loan. Essentially, it's a program that allows the homeowner to make money on the equity of their home and is only used in when really needed.
While you defer paying on the money you get, you are in charge of paying interest and taxes on the amount.
It may be an option, but it's one that comes with a price. In fact, the Washington Post states that 90,000 reverse mortgage loans held by seniors were at least 12 months behind in payment of taxes and insurance and were expected to end in “involuntary termination” in fiscal 2017.
Alternative: Seller Financing
If you want to get a mortgage on an investment property after you've bought it with cash, why not try seller financing instead? While you may have a higher interest rate, you should be able to refinance before the balloon payment with an increased credit score and lower payments. The benefit? You don't have the fees that often come with taking money out of your assets like your retirement fund.
What's Better: Traditional Mortgage or Mortgage After Purchase?
It's all debt when it comes down to it. As most investors know, leveraging debt makes a lot of people a lot of money. But it can also ruin millions.
It really comes down to your specific situation. Do you have money in reserves? What is the reason for taking out a mortgage on your house? Can you wait and save instead?
In the end, only you and your financial advisor can make the best decisions on managing your money and debt. Talk to a trusted financial advisor before making any large decisions such as getting a mortgage on a house you already own.