Yes, you can use what’s called a home equity loan to buy another house. This is also called a second mortgage, and you can use it to purchase another home. It also reduces any out-of-pocket expenses.
However, taking equity out of your home to buy another home is not without its risks.
Below, we’ll take a look at how you can use a home equity loan to buy another house, the advantages and disadvantages of doing this, and what the other options are.
If you would like to use home equity to purchase a new home then the value of your home will need to be enough to support the loan, and like any other loan, you’ll need to meet the lender’s requirements.
Here’s what you need to do to get a second mortgage to buy another house.
Find out how much you want to borrow: Before taking equity out of your home to buy another house, you’ll need to decide how much you want and need.
Home equity loans also put a limit on how much you borrow. Normally you can only access up to 85% of the equity in your home.
Get ready to start the application process: Approval for a home equity loan will depend on a few factors. The value in your home will determine the maximum amount of equity available, and your financial situation will determine how much of that equity you can borrow.
Your lender will look at your credit score, income, other outstanding debts, and other additional information.
Choose the most appropriate home equity loan: You can use any lender when taking out a home equity loan, it doesn’t even have to be with your current bank or mortgage company.
The best way to get the most competitive interest rate is to get quotes from multiple lenders. When looking for a quote, consider the interest rate, loan terms, fees, and estimated closing costs. Rates and particular terms can also be negotiated with lenders.
Apply to the loan with the best terms: Once you’ve found the loan with the best terms you can apply. Submit the application and provide the requested information, and then your lender will determine the value of your home via an appraisal.
Close on the loan: After the underwriting process is finished, your loan will be ready to close. It’s important you understand the terms of your loan before it is finalized.
The Three-Day Cancellation Rule also applies with a home equity loan. This means that you can cancel the loan without being penalized within three days of signing the loan documents.
Saves you money: Using the equity in your home to buy a second home helps you save money that you would otherwise use for the home purchase. This increased cash flow can be used for emergencies or other investments.
Increases your borrowing power: Buying a house with equity lets you make a larger down payment on your home, or it could even cover the entire cost of your new home.
There’s a lower interest rate than other forms of borrowing: Home equity products typically have lower interest rates than unsecured loans, like personal loans. Using home equity is a less expensive option than borrowing without putting up collateral.
Your primary residence is at risk: Using a home equity loan to buy a new house could put your primary home at risk if you’re unable to handle the payments.
Multiple loan payments: Taking equity out of your home to buy another house means having potentially three loans to pay back if your primary residence and your second home have a mortgage in addition to the home equity loan.
Higher interest rates: Home equity products have higher interest rates than mortgages, meaning you’ll be borrowing at a higher total cost.
Paying closing costs: You will have to pay closing costs when using equity to buy a new home, which can range from 2% to 5% of the loan amount.
Using a home equity loan to buy another house isn’t the only option for borrowers. Let’s take a look at a few more options for using equity to buy a new home.
Cash-out refinance: This accomplishes two goals. First, it refinances your existing mortgages at market rates which may lower your interest rate. Secondly, it rewrites the loan balance for more than you currently owe, meaning you’ll have a lump sum you can use for purchase of your new home.
Taking equity of a home to buy another with a cash-out refinance may be the best option because you’ll just have one mortgage rather than two. However, interest rates on cash-out refinances are higher than standard refinances, so it really depends on the actual interest rate.
Home equity line of credit (HELOC): These are similar to home equity loans, but instead of receiving the loan proceeds upfront, you have a line of credit you can use during the loan’s ‘draw period’ and repay during the repayment period.
This option can be helpful if you’re flipping a house, as it allows you to purchase the property, pay for renovations and repay the line of credit when the property is sold. However, interest rates are variable with HELOCs, so this may not be the most secure option.
Reverse mortgage: If you’re aged 62 or older you have an additional option of using equity to buy a second home. This is called a Home Equity Conversion Mortgage (HECM). It is more commonly known as a reverse mortgage, and allows you to access home equity without making payments.
The loan is instead repaid when you leave the home. They are a flexible way of using equity to buy another home, as you can choose between receiving a lump sum or a line of credit.
However, while you don’t need to make payments with a reverse mortgage, it still accrues interest. Therefore, the loan balance will grow and can eat up all of the home’s equity.