Can I Use Home Equity Loan To Buy Another House: A Guide To Leveraging Your Property’s Value
If you already have a home, using your home equity to purchase another home can be one of the simplest and least expensive methods of buying property. By leveraging your home equity to finance a second property, you’ll be saved from having to dip into investments or cash savings.
In this guide, we’ll go over the key things you need to know about buying another property with your current home’s equity. We’ll also cover the different methods available to leverage your home’s equity, the pros and cons, and other important considerations.
How To Buy Another House With Your Home Equity
Purchasing a new property with your home equity requires you to use your home as collateral for the loan. To purchase a new property using your home equity, there are several types of home equity loans you can consider depending on your circumstances and requirements. The different types of home equity loans will be covered later in this guide.
Why Use Home Equity To Buy Your New House?
Generally, home equity loan providers are more willing to offer better terms than conventional loans. And because they’re easier to lend out, you’ll usually get lower closing costs, or even have lenders cover them entirely. Not just that, since your property is the collateral for these loans you’ll qualify for lower interest rates as well. These interest rates are also tax-deductible, which means you save even more on loan payments.
Also, by using your property to buy your new home you don’t divert money from your current investments and savings. And if you’re using your second home as a rental, you’ll be able to profit more from the smaller monthly payments.
The Downsides Of Leveraging Your Home Equity
However, there are some things you need to consider before leveraging your home equity. Using it to buy a second home means that your funds are tied in a less-liquid asset. Once your home equity goes toward buying a new house, you can only build it back by either repaying the loan or selling your new house.
Another thing to keep in mind is that the real estate market isn’t always guaranteed to improve. The house’s value might actually decrease over time. Most importantly, using your house as collateral allows lenders to foreclose on your home if you default on the loan – therefore, it’s essential to ensure that you’re able to make your loan payments!
The Different Types Of Home Equity Loans For Your New House
There are generally three types of home equity loans that you can use to finance the down payment of your new residence. Here we explain each of them so you can see which one is right for you.
Fixed-Rate Home Equity Loans
This one is the most straightforward and most like a traditional mortgage. You receive a lump sum from the lender, which you repay over a certain period with a fixed rate of interest. Generally, the term is usually 5-15 years, and the loan must be paid fully if you sell the home.
Home Equity Line Of Credit (HELOC)
A Home Equity Line of Credit works a little bit like a credit card. You have an approved limit of credit that you can withdraw as needed, and you only need to pay back that amount instead of the whole value of the HELOC. For instance, if you have a $15,000 HELOC and you borrow $8,000 before paying $6,000 back, you'll still have $13,000 in available credit.
However, a HELOC's interest rate follows the market rates, so your interest may go up or down throughout your credit line. At the end of a HELOC's term, your outstanding loans must be paid in full.
A cash-out refinance is an option to replace your existing mortgage with a new one that has more favorable terms. This is done by turning your home's equity into cash by taking out a new mortgage that's bigger than what you owe. Instead of having two mortgages, you now have just one mortgage with an extra cash payment upon closing the refinance.
If you're 62 or older, a reverse mortgage could also be an option. A reverse mortgage allows you to use your home equity and turn it into a lump sum or a line of credit that won't have to be repaid until you leave your property.
In a reverse mortgage, the lender pays the homeowner in a lump sum or periodic payments. During the loan's life, their debt will increase while their home equity decreases. When the homeowner leaves the property or passes away, the property's sale is used to pay off the loan and any remaining proceeds go to the homeowner (if still living) or their estate.
Which Type Of Home Equity Loan Is Right For Financing A New Home?
A fixed-rate loan is a good idea if you know exactly how much money you need to purchase your new property. It’s also great for consistent budgeters who prefer a non-variable interest rate.
If you need flexibility and don't want to borrow a large amount of money right away, a HELOC could be the right choice for you. You can take away as much or as little money as you want from the line of credit, and you don't have to fear falling into too much debt. Of course, the upside of this flexibility is balanced out by fluctuating interest rates.
Cash-out refinancing may net you a better rate than other loans, making it worthwhile if you're looking to reduce what you need to pay and turn some of the value of your property into cash.
If you're looking to move out and enjoy your retirement, then a reverse mortgage could be an enticing option. Older couples wanting to move to a smaller residence or condo after their kids have moved out can use a reverse mortgage to buy a smaller property to move into.
At the end of the day, the kind of loan you take out to buy your new home will depend on your unique circumstances. Consider the options and pick the one that best suits you.
Tips For Buying A New Home With Your Home Equity
Consider if using your home equity to buy a new home is right for you. Know the risks and make sure that you can make the payments on time to avoid foreclosure.
Make sure that you have at least 20% equity in your home. Having lower home equity could incur extra costs in the form of private mortgage insurance when taking out your loan.
Make a big down payment on your first property. This starts you out with a smaller mortgage loan balance, creating more equity in your house early on.
If you have the means, pay more on your mortgage. This allows you to decrease the money you owe faster – and by doing that, you’ll increase your home loan’s equity faster.
If you're looking to take on a mortgage, you can consider a shorter term. A 15-year mortgage would build more equity per month than a 30-year mortgage but consider your ability to pay the installments as well.
Improve the value of your home by taking on home improvement projects – especially smaller projects like replacing your garage door, adding insulation, or better front doors. Be sure to pay for these with cash.
Before going to a lender, check your credit score. Better credit scores could lead to potential rate breaks that allow you to save more.
Have options by comparing loan offers from several different lenders – including your primary mortgage lender. Consider the interest rates, annual percentage rates, and other factors involved.
If you’re still not sure about taking out a home equity loan, consider other alternatives as well.
Leveraging the value of your current residence can be one of the most viable ways to purchase a new property without having to dip into your cash reserves or investments.
However, if all the different options of leveraging your property's value are confusing you, Wesley Mortgage, LLC is here to help! Reach out to us and we'll guide you through every step to make sure your home's value is used to its fullest.