When it comes to buying a second home, there are several ways you can fund the purchase. In addition to obtaining a mortgage, you can use money from a savings account or complete a cash-out refinancing of your primary home, just to name a couple examples.
Another way to go is selling stock, which can be an option for many second-home buyers in 2021 as the stock market sits near all-time highs. However, as with most major financial decisions, there are pros and cons to consider.
Reasons you might want to sell stock to buy a second home
There are some good reasons you might want to sell stock to fund your second home purchase. Although not all of these will apply to everyone, here are some things to keep in mind as you weigh the pros and cons.
Larger down payment – Selling stock could give you a larger down payment to apply to your second home purchase, which would make your monthly mortgage payment lower than it would be with a lower down payment. If keeping your ongoing expenses low is a priority, using a larger down payment than your lender requires can help you do it, and selling stock can certainly help achieve this goal.
Keep your debts low – The more money you put down, the less you'll owe. If you want to keep your debts low, selling stock to fully or partially fund your second home purchase can be a smart move.
Many stocks are near all-time highs – Although 2020 was a turbulent year in the stock market, the S&P 500 and many individual stocks are sitting at all-time highs, or very close. I don't recommend selling stocks just because they went up, but using them for an asset purchase like a second home can be a good reason to cash in some of your chips.
Your second home will be an investment – As a final consideration, there's a big difference between selling stock to buy something for personal use and selling stock to buy another investment. If your second home will be an investment, meaning you plan to rent it out to generate income when you aren't using it, selling stock to fund the purchase is more easily justified.
Reasons you might want to fund the purchase in other ways
Of course, like any major financial decision, there are drawbacks to using stock sales to fund the purchase of a second home. A few you might want to consider:
Borrowed money is cheap now – Mortgage rates are still near all-time lows, and second- home financing can be obtained with interest rates that are comparable to those given to primary residence borrowers. Simply put, borrowed money is cheap right now, so if you don't really want to sell your stocks, using a mortgage to buy your second home isn't necessarily a bad idea.
You could miss out on upside – Stocks are meant to be long-term investments, and by selling them you could miss out on years of future upside. This can certainly be justifiable, especially if you're planning to use your second home as a part-time rental property, but the potential loss is worth considering.
Stocks are liquid, real estate is not – It's also worth considering what happens if you need access to your money. In an emergency, you can sell your stocks and get your money with the click of a mouse. But real estate is a rather illiquid investment, and it can take months to sell a home for its true market value.
The Millionacres bottom line
The key takeaway is that just like any major financial decision, there's no perfect answer to the question of whether selling stock to buy a second home is a good idea. It depends on the particular circumstances of your purchase and your own financial situation.
And as a final thought, using more than one source of funding can be a viable option. As a personal example, my wife and I are in the market for a vacation home, and in addition to using our savings, we're also considering a cash-out refinance of our primary home or potentially selling a bit of stock to fund the purchase.