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How can I use a house I own free and clear to purchase another home? I want to buy another home using a house as collateral.

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    Why do you want to use the existing house as collateral instead of using the new one as collateral for itself (i.e., an ordinary mortgage)? – BrenBarn Jul 7 '16 at 2:02
  • How would you use the new house as collateral? I thought I could use the house that is paid for as collateral to buy a new house. – cynthia Jul 7 '16 at 2:12
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    A normal mortgage is an arrangement where you take out a loan to buy the house, and the house itself is collateral for the loan. – BrenBarn Jul 7 '16 at 2:41
  • hi @BrenBarn, obviously you use the equity of the first house to leverage the second one. This is totally standard procedure (and I don't even know much about mortgages!) Say the house A is worth $1,000,000. If you own house A house free and clear, you can immediately get a mortgage of say $700,000 with no fees or PMI and an extremely low rate. You can then just immediately buy outright house B for cash (if it is less than $700,000), slashing your costs, fees, rate, and insurance. – Fattie Jul 7 '16 at 14:02
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As pointed out in a comment, it would be more natural to get a regular mortgage on the second house, which is essentially using the second house as collateral for its own loan. If you are to use the first house, either mortgage it or get a home equity line of credit on it and use that money to buy the second house.

The relative merits of the options may depend in part on where you live, whether or not you live in the homes, and the relative cost of the two properties. For example, in the US, first and second homes get preferred tax treatment in addition to rates that are typically better than commercial loans (including mortgages for investment properties). If you're going to get a better rate and pay less taxes on one option and not on the others, that's definitely something to weigh.

  • Will I need to have a down payment to purchase the new home? – cynthia Jul 7 '16 at 2:15
  • You will want a payment of at least 20% to avoid the extra cost of PMI and possibly a higher interest rate as well... , but if you are willing to pay for that insurance to protect the lender it's really a matter of what that particular lender is willing to do for you. – keshlam Jul 7 '16 at 2:43
  • Hi Cynthia - I'm fairly sure you can do exactly what you are implying. You should definitely be able to get a mortgage of 100% of the value of the SECOND house, AND PAY NO PMI, by including the equity of the first house. – Fattie Jul 7 '16 at 13:59
  • I can't agree with your answer, Brick. Every single person I have ever known who bought a second (or further) property after owning the first one outright, takes the latter course of action - the "natural" procedure is to simply get a fat loan from house A and then pay cash. Of course you may have to wrap BOTH of them in to the mortgage if the second one is more than (say) 70% the price of the first. – Fattie Jul 7 '16 at 14:04
  • @JoeBlow I think that I agree with your comment, so I'm not sure what the disagreement is. The "usual" path is almost surely better here, but the question doesn't ask for best. It asks for options that allow for using the first house. – user32479 Jul 7 '16 at 14:11
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How can I use a house I own free and clear to purchase another home?

Answer: walk in to any bank, that's any bank, or any lending institution.

State that you own a house free and clear.

This will happen:

They will throw money at you.

In all jurisdictions, it's incredibly easy to borrow large amounts of money at the lowest possible rate, once you own a house outright.

On top of that, you want to spend the money on another house (as opposed to s sports car or the like), so you have even more equity. Winner!

Your main question will be this. Say your current house (owned outright!) is worth $500,000. Go to a bank or lender, and say to them, "How much money will you give me to buy house B putting both the houses on the mortgage." One bank will say "fantastic! buy any house you want up to $400,000!" Another will say "$450,000!" another will say "$300,000!" In a hot market another will say "$650,000!". So shop around and see who will give you the most.

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    The OP didn't state a jurisdiction, so the following US-centric comment may or may not apply: This strategy of lumping two homes into a single loan may have negative tax consequences in the US if the OP lives in either house. That's something that should be considered carefully before trying to do something like this. Mortgage interest on first and second homes gets preferred tax treatment. I'm not convinced that this type of loan will qualify for that tax treatment since I've only seen this listed as a commercial "blanket" loan rather than a proper "mortgage". Something to check at least. – user32479 Jul 7 '16 at 14:24
  • For sure - tax considerations are everything, good point! – Fattie Jul 7 '16 at 14:28

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