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If you are thinking of buying a new home, you might be wondering what to do with your current home and mortgage. This is a common dilemma for many homeowners who have built up equity in their homes and have low interest rates on their current mortgage. Should you sell your home and cash out your equity, or keep it and rent it out? What are the pros and cons of each option? Let’s explore this issue with a hypothetical scenario.

Suppose you currently own a home that is worth $600,000. You owe $450,000 on it, so you have $150,000 in equity. And the rate on the $450,000 mortgage is at 3.250%. But the home you own is too small for your needs. So, you are purchasing another home that suits you better. You want to know what to do with your current home. Here are some possible solutions:

Sell the home

This is the most common option because most people need the $150,000 that is locked up in the current home for down payment or upgrades on the new home they are purchasing or placing that money into an investment account to build wealth. The downside to this option is that you are paying off a mortgage at 3% that is much lower than the current market rates. That low rate is amazing leverage for your wealth building journey. You might also have to pay capital gains tax on the sale of your home, depending on how long you have lived there and how much profit you make.

Keep the home and rent it out.

This is less common option because the idea of renting a home can seem overwhelming. Although there are companies out there that can help you manage that and make it easier. This option is great because rents have gone way up in AZ. Yet the low rate fixed mortgage you have is likely much lower than what you can get in rent. This could turn your current home into an income producer to help you have even more cash flow and provide another source of income. This option could be a great way to diversify your portfolio and take advantage of the appreciation of your property over time. We recently wrote a blog on 3 things you need to know about owning houses for rental income.

PRO TIP – You can get a second mortgage home equity line of credit (HELOC) that gives you access to the $150,000 to use however you want. A HELOC is a revolving line of credit that allows you to borrow against the equity in your home as needed. You only pay interest on the amount you use, and you can repay it at any time. A HELOC can be a flexible and convenient way to finance your new home purchase, home improvements, debt consolidation, education expenses, or any other major expenses. Some of the benefits of HELOCs are:

  • They usually have lower interest rates than other types of loans or credit cards.
  • They may offer tax deductions on the interest paid, depending on how you use the funds.
  • They allow you to access your equity without selling your home or refinancing your mortgage.
  • They give you more control over your finances and budget.

As you can see, there are different options for what to do with your current home and mortgage if you buy another home. The best option for you depends on your personal situation, goals, preferences, and risk tolerance. The good news is, you do not have to make this decision alone! At Stewardship we are a team of Real Estate, Home Loan, Insurance, and Financial Advisors serving you with wisdom and love. We have the expertise, experience, and tools to help you properly evaluate your situation so you can make the wisest move.

If this is a situation you would like personalized advice on, give us a call at 602-384-2604. We would be honored to help!