Personal Finance

Need help with Buying a second home, HELOC, 20% down payment, etc..

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  • Jan 27th, 2011 10:38 am
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[OP]
Jr. Member
Jan 18, 2009
123 posts
118 upvotes
Toronto

Need help with Buying a second home, HELOC, 20% down payment, etc..

Hello All,

I need some help regarding buying a second home and coming up with 20% down payment. Any help is greatly appreciated.

I bought my current home for $262k. The mortgage I took was $250k, I've paid it down to $224k (with no extra payments). Total principle in the home is $38k (not taking into consideration the appreciation in value past 3 years)

Now.. The home I wish to upgrade to is in the $550k range. They need 12.5% down at least which is $68k. I actually have that amount saved in cash which I should have thrown down on my current mortgage but decided to invest instead since my current rate is so low. I ca take out this cash within a day's notice, it's not locked.

Issue: If I throw some of my current savings (lets say $35k) into my current mortgage, that would bring it down to $189k ($224 minus $35). This entitles me to HELOC right since I have enough value in my home?

Question:
- Can I then use the HELOC as a down payment for my future home? How does that work if you're planning on selling the first home?
- How much worth of HELOC can I get considering the example above, just whatever principle I put in?
- Is HELOC based on the value I bought the house ($262k) or the mortgage I took ($250k) or the current home value ($300k+)? Like when they say ypu have to have 20% of your home paid off, which number do they mean?

I know some of you would ask, why not just continue saving the cash and put it down.. I have my reasons, but I need to drop this cash into the mortgage and I just want to make sure I have access to it easily when it's time to make a down payment on the second home.

Thanks guys!
11 replies
Member
Nov 15, 2006
307 posts
67 upvotes
HELOC is based the current value of your house. That is why bank may charge you the appraisal fee.

In your case, you may get 300x0.8-189=51k or more(some bank may give you 0.85? 0.9?)
Deal Fanatic
May 29, 2006
9773 posts
2448 upvotes
yes a heloc can be used for a downpayment, we are currently doing this to avoid CMHC fees.

and the HELOC is based on the banks appraisal, so what you think it will sell for, and what they think, can be 2 different things.

they do either 80% of their appraisal, or 60% of the property tax appraisal.

remember, you dont need to put 20% down, but by doing so you avoid cmhc and save around 7-10k in fees.

If your building a new home, you can get a builders mortgage, where you get a 1 year lock on interest rates, and they will forward X amounts of dollars when needed to the builder (my builder only required 10% down, 90% on completion)
[OP]
Jr. Member
Jan 18, 2009
123 posts
118 upvotes
Toronto
So the general rule is 20% of the current value of the house?..

What about the rate for HELOC, is it generally the same as a mortgage rate or alot higher?

Anyone else who can answer my other question, it would be great!
[OP]
Jr. Member
Jan 18, 2009
123 posts
118 upvotes
Toronto
rocking23nf wrote: yes a heloc can be used for a downpayment, we are currently doing this to avoid CMHC fees.

and the HELOC is based on the banks appraisal, so what you think it will sell for, and what they think, can be 2 different things.

they do either 80% of their appraisal, or 60% of the property tax appraisal.

remember, you dont need to put 20% down, but by doing so you avoid cmhc and save around 7-10k in fees.

If your building a new home, you can get a builders mortgage, where you get a 1 year lock on interest rates, and they will forward X amounts of dollars when needed to the builder (my builder only required 10% down, 90% on completion)

My builder says they want 12.5 down, so that means if I want to pay 20% down, the remaining 7.5 is due at closing, right?
Deal Fanatic
May 29, 2006
9773 posts
2448 upvotes
Day_Trader wrote: So the general rule is 20% of the current value of the house?..

What about the rate for HELOC, is it generally the same as a mortgage rate or alot higher?

Anyone else who can answer my other question, it would be great!

rates for heloc are prime + 0.5 right now, and you can pay interest only.

We currently have a 48,000$ one, and its around 150-160 a month payment
Deal Fanatic
May 29, 2006
9773 posts
2448 upvotes
Day_Trader wrote: My builder says they want 12.5 down, so that means if I want to pay 20% down, the remaining 7.5 is due at closing, right?

you pay 12.5 to the builder
80% from the bank/broker
7.5 from your own money

or

87.5 from the bank/broker, and you pay cmhc fees.
Sr. Member
Nov 13, 2007
874 posts
117 upvotes
Toronto
If you are planning to sell your first home, I don't see the point of getting HLOC. There will be an appraisal fee and legal fee ($700-800 maybe?). Plus, you will have additional debt against you, which may cause you problem when you try to get an approval for 550k home mortgage. Your debt ratio may be too high.

It's even worst if you have a variable rate, you put your cash into mortgage, saving you maybe 2.3% (prime - .7%) and then take out HLOC, which is prime +0.5%. That's 1.2% of interest that you shouldn't be paying.

Why don't you just sell your investment into cash for the down payment. Since you have plan you use your money within a year, you might wanna turn your equity into less volitile investment.
[OP]
Jr. Member
Jan 18, 2009
123 posts
118 upvotes
Toronto
rocking23nf wrote: you pay 12.5 to the builder
80% from the bank/broker
7.5 from your own money

or

87.5 from the bank/broker, and you pay cmhc fees.


Not sure this makes sense. The 12.5 that the builder wants is NOT part of the 20% downpayment that would exclude me from paying fees? So its actually 12.5 + 20% to avoid fees?
[OP]
Jr. Member
Jan 18, 2009
123 posts
118 upvotes
Toronto
^ Oops, I reread it, so yes, the 12.5 going to the builder is part of the total 20% to avoid CMHC fees.
[OP]
Jr. Member
Jan 18, 2009
123 posts
118 upvotes
Toronto
Question: Is HLOC the only alternative in this situation if all your equity is tied in to your home?
Sr. Member
May 24, 2007
509 posts
9 upvotes
Day_Trader wrote: Question: Is HLOC the only alternative in this situation if all your equity is tied in to your home?

You can refinance or get a second mortgage (essentially a HELOC).

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