You can get a home equity loan to purchase another house. A home equity loan, also known as a second mortgage, can be used to buy another house. It can reduce or eliminate homeowner’s out of pocket expenses.
There are risks involved in taking equity from your home to purchase a second house. Find out more about home equity loans for second homes.
How to get a loan from your home equity to purchase another house
You will need to have enough equity in your home to qualify for a loan to buy a home.
Here are the steps to obtain a second mortgage in order to purchase another house.
1. Decide how much money you need and what amount you want. You can only borrow a maximum amount with home equity loans.
2. Preparation for the application process. Approval for a home equity loan is dependent on many factors. Your home’s value will determine how much equity you can borrow. Financial information and financial statements will also play a role.
Your Beverly Hills Mortgage Broker will also review your credit score, income and other outstanding debts.
3. You can shop around for a home-equity loan. You don’t have to get the loan with your bank.
The best way to find a low interest rate is to compare rates from different lenders. Compare the interest rate, loan terms and estimated closing costs. The Beverly Hills Mortgage Broker can negotiate a rate or term.
4. Apply for the loan that has the best terms. Once you have completed the application, you will need to provide the required information.
Beverly Hills Mortgage Brokers will either order an appraisal or calculate the value using another method.
5. You can close the loan once you have completed the underwriting process. Make sure to read the terms before you sign the loan agreement.
You should also know that the Three Day Cancellation Rule allows for cancellation of a home equity loan with no penalty within three days after signing the loan documents.
There are pros and cons to using equity to purchase another home
Consider the pros and cons before you take out a loan to purchase a second house using your equity from your home.
Pros
- Your cash flow will be protected. You can use your home equity to purchase a second house. This will allow you to keep cash that you wouldn’t otherwise be able to spend on the home purchase. This cash flow can be used to build an emergency fund or for other investments.
- Your borrowing power will increase. You’ll be able to pay more for a house if you have equity.
- Borrowing at a lower interest rate will be possible than other types of borrowing. The interest rates on home equity products are typically lower than those for unsecured loans like personal loans. Home equity will cost less than borrowing money without collateral to buy a home.
- With an additional mortgage, you will have higher approval chances. Lenders are more comfortable with home equity loans than they are with mortgages on second homes. This is because the borrower’s primary residence is their priority. It may be easier to obtain a home equity loan for a second house than a separate mortgage.
Cons
- Your primary residence could be at risk. If you are unable to pay the monthly payments, using a home equity loan for a house purchase can put your primary residence at risk.
- Multiple loan payments will be due. If you take equity from your home to purchase another home, you could end up with three loans.
- Higher interest rates will be charged than a mortgage. You’ll pay more for your home equity product than you would on a mortgage.
- Closing costs will be paid. You will have to pay closing costs if you use equity to purchase a new house. These can be anywhere from 2% to 55% of the loan amount.
There are other options available for purchasing a house with equity
Borrowers have many options. These are just a few of the other options available to borrow equity to purchase a home.
Refinance with cash-out
Cash-out refinances are one way to purchase another property with equity. Two goals are achieved by a cash-out refinance. It refinances your existing mortgage at current market rates, potentially lowering the interest rate.
It will also rewrite your loan balance to pay more than you owe. This allows you to walk away with a lump-sum to put towards the purchase of a new home.
A cash-out refinance is a way to take equity from a home and buy another one. You’ll only have one mortgage, instead of two. Cash-out refinances have higher interest rates than standard refinances. The actual interest rate will decide if this is a good decision.
Credit line for home equity
Another option is to use your home equity to buy a home. HELOCs can be compared to home equity loans. However, instead of receiving the loan proceeds upfront you will have access to a line credit which you repay over the “draw period”.
This is a great way to use equity to buy property investment properties. It allows you to buy the property, make renovations, and then repay the credit line when it sells.
HELOC interest rates are often variable so this option can be volatile.
Reverse mortgage
Homeowners over 62 years old have the option to use equity to purchase a second house. This is called a Home Equity Conversion Mortgage.
A reverse mortgage is a HECM. It allows borrowers to access their home equity without having to make payments. Instead, the loan can be repaid once you move out of your home.
Reverse mortgages offer a flexible method of using equity to purchase another home. Borrowers can choose between a lump sum and a line credit.
Keep in mind, however, that a reverse mortgage won’t require you to make any payments, but interest will accrue. This can cause the loan balance to increase and could lead to the loss of all the equity in the home.