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 using a home equity mortgage to buy a second house.
How to get a loan from your home equity to purchase another house
To use your home equity to buy a home, you will need to have a sufficient amount of equity. You’ll also need to meet the lender’s requirements. This is how you can get a second mortgage for another home.
1. Choose how much money you need and what amount you want. The maximum amount you can borrow with home equity loans is limited. You can borrow up to 85% of your equity. If your home is valued at $350,000 and you owe $250,000 on it, then you would have $100,000 equity. This example shows that you can borrow $85,000 maximum.
2. Preparation for the application process. Approval for a home equity loan is dependent on many factors. Your home’s value will determine the maximum equity amount you can borrow. Financial information and credit score will also play a role in determining how much equity you can borrow. Your credit score, income and other debts will all be considered by your lender.
3. You can shop around for a home loan to fund your second home. You don’t have to get the loan with your bank or mortgage company. It is a good idea to compare interest rates from different lenders to find the most competitive rate. Compare the interest rate, loan terms and estimated closing costs. The lender may also allow you to negotiate a rate or term.
4. Apply for the loan that has the best terms. Once you have completed the application, provide all the required information. Your lender will either order an appraisal or calculate the value of your home 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 documents. You can cancel your home equity loan by using the Three Day Cancellation Rule within three days after signing the loan documents.
There are pros and cons to using equity to purchase another home
Think about 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. You can use this cash flow to build an emergency fund or invest in 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 a handful of 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, which could potentially lower your interest rate. It rewrites your loan balance to pay more than you owe. This allows you to walk away with a lump-sum to be used for the new home purchase.
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 alternative 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 an amazing way to use equity to buy property investment properties. It allows you to purchase the property and pay for renovations. Then you can repay the line when you sell the property. This option is not without risk, however, because HELOC interest rates are often variable.
Reverse mortgage
A Home Equity Conversion Mortgage (HECM) is an option for homeowners 62 years and older who wish to use equity to purchase a second home. 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 whether they want a lump-sum or a line credit. Reverse mortgages don’t require you to make monthly 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.