Using Equity in an Existing House as a Down Payment on a New One

Trading up is an integral part of the American home ownership dream. You buy a starter house, wait for it to go up in value and sell it, and use the profit as most or all of the down payment on a nicer house.

Assuming a rising real estate market, trading up to raise down payment money works better than saving money or making other investments, because purchasing a house is a highly leveraged transaction -- the amount you invest is only a small part of the amount you borrow. In any leveraged transaction, you see big gains not only on your money, but also on money you've borrowed. For example, if you put $20,000 down on a $200,000 house (borrowing $180,000) and the house jumps to $300,000, you've made $100,000 with a $20,000 investment. By contrast, if you deposited the same $20,000 in an unleveraged investment, such as stock or art, and it goes up the same 50%, you'd end up with $30,000.

Next Steps

Once you've scared up some money to use as a down payment, you'll need to qualify for a mortgage.