Q. I’m thinking of buying a vacation cottage worth about $ 200,000. I have $ 100,000 in cash and a $ 100,000 equity line on my first home. I have good credit and can probably get a mortgage. What’s the best way to do it?
– Buyer, maybe
A. There are several options for purchasing a vacation cabin.
Without knowing some more important details about your financial life, such as your age, income, and other assets, it’s hard to know which will be the best choice for you.
But here are a few things to consider.
In general, using all your money and the equity line to buy the cabin would not be recommended, said Ken Van Leeuwen, a certified financial planner at Van Leeuwen & Company in Princeton.
“Using all of your money will deplete the liquidity you currently have and instead redirect that liquidity to a non-functioning illiquid asset,” he said.
It is important to consider the alternative in that case, who would use some of the money as a down payment and get a mortgage, he said. This allows you to maintain your cash flow and presents a unique opportunity to grow the remaining cash flow through liquid investments, if your risk tolerance and time horizon allow it, he said.
And with interest rates still historically low, financing the purchase and investing the remaining cash may be a better option for you, he said.
Van Leeuwen said there are potential risks in using the home equity line rather than a mortgage.
“With interest rates remaining at historically low levels and a reasonable expectation that they will increase in the future, a home equity loan presents certain risks because their rates generally fluctuate with changes in interest rates,” he said. he declared. “A fixed rate mortgage eliminates the risk associated with rising interest rates by allowing you to lock in a low mortgage rate now. “
Good luck with your vacation home.
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Karin Price Mueller writes on Bamboo column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com‘s weekly electronic newsletter.