Buying a new home means a major financial investment. And this type of investment usually means a lot of money upfront and for years to come. So, unless you’re a millionaire, you’ll probably have to depend on a loan to fulfill your dream of buying a second or third home.
A home equity loan can provide you with a large sum of money in hand, but can you use it to buy another property? Let’s find out.
Can You Buy Another House with a Home Equity Loan?
The simple answer to whether you can buy another property with a home equity loan is yes. Yes, you can buy a new house, condominium, or another type of property with a home equity loan.
If you have built up enough equity in your current home, you can apply for a home equity loan against it for various reasons.
- Pay off your unsecured debts
- Repair your primary residence
- Start a business
- Pay for a vacation
- Go to college
- Buy another property
It’s really up to you how you want to use the loan and you may even be able to deduct the interest on your taxes depending on how you use the funds.
Home Equity Loan vs Home Equity Line of Credit
Unlike a home equity line of credit (HELOC), you will automatically get the entire amount of money available upfront and will have fixed monthly installment payments. With a HELOC you don’t have to withdraw all your available credit but can if you want and will only get charged interest on the amount you withdraw.
Both a home equity loan and line of credit can be used to purchase another home. However, some lenders may not agree to accept either one as the source of the down payment for a new house and, in that case, you must make the down payment in cash. There may be workarounds, though, so talk to your trusted mortgage lender.
How Much Money Can You Get to Buy Another House?
How much money you can get to buy another property depends on various factors.
- The fair market value of your current property
- Amount of equity you have in your home
- Current employment circumstance and income amount
- Your credit history and score
Mortgage lenders typically approve home equity loans up to 85% of the fair market value of your home.
Should You Take Out a Home Equity Loan to Buy Another Property?
Before you borrow funds via a home equity loan to buy another house, condo, or another type of property, it’s imperative to understand the pros and cons of taking such an action.
Pros of Using a Home Equity Loan
- It’s a convenient option: Home equity loans and lines of credit are usually easy to obtain if you have good credit, a solid income, and plenty of equity in your primary residence or other property being used.
- Large funds from a single source: Since home equity loans are secured to your property, it’s typically easier to get approved for larger sums of money and becomes easier to make a large down payment toward the new property. Larger down payments can help you avoid private mortgage insurance on the new piece of real estate and reduce interest costs.
- Low interest rate: The interest rates on home equity products is typically lower than personal loans and credit cards.
- Quick turnaround time: Usually, lenders don’t take too much time originating home equity loans because they can skip some of the tasks required for a new home purchase loan.
Cons of Using a Home Equity Loan
- Failure to Pay Could Cost You Your First Home: If you fail to make your monthly payments on the loan, you can lose the primary residence against which you have taken out the home equity loan. A home equity loan is a secured debt, and your primary residence is the collateral. In the event of a loan default, lenders will foreclose on the property.
- You Will Have to Pay More Monthly Debts: There is another disadvantage of taking out a home equity loan for buying another property. If you haven’t completely paid off the first mortgage on your primary residence, you may end up getting overwhelmed with the number of payments you have to make each month.
You’ll now have to make payments on your primary mortgage, the home equity loan (second mortgage), and the new home loan. You’ll now have three mortgage-related debts on your shoulder instead of just the one.
Furthermore, if you lose your job or face a sudden medical emergency, the added debt along with the financial trouble could make it even harder to stay up on your payments.
A mortgage loan is a secured debt, so you can’t use a debt consolidation program to eliminate it. You will have to either refinance the loans, opt for a mortgage modification, or file chapter 13 bankruptcy. However, all these debt relief options have an eligibility requirement. Unless you’re able to qualify for them, it may be hard to get back on track with your mortgage debts. - You May Have to Pay Closing Costs: You will have to pay the closing costs on a home equity loan that varies between 2% and 5% of the loan amount. However, you may be able to find a lender that waives some of the closing costs for you.
What are the Other Down Payment Options for Buying a Home?
If you don’t qualify for a home equity loan or are not sure it’s the right fit for you, you shouldn’t give up your dream of buying another property because there are alternative options to explore.
Save Money for the Down Payment
Instead of giving up your dream, you can postpone buying another property until you can afford the down payment on your own. Start to save by regularly putting money into a high-yield savings account that you won’t touch. You should consider creating an automatic savings plan.
Take Out a Personal Loan
You can borrow the down payment using a personal loan, but you’ll likely pay a higher interest rate. Personal loans are typically unsecured, though, so one won’t be tied to your first home and the bank won’t be able to foreclose on it if you fail to pay. One of the biggest challenges is finding a lender who will let you borrow a significant amount of money.
Refinance Your Current Home Loan
Another option is to refinance your current home loan for more than you owe on it and keeping the difference as cash. This is referred to as cash-out refinancing.
With cash-out refinancing, you take out a larger loan on the original home based on what it’s worth today. This will only work if your property value has gone up or you’ve made a significant number of payments. You use the money to pay off your current mortgage loan and can use the extra cash for the down payment on the other house.
Cash-out refinancing makes the most sense when the new annual percentage rate (APR) will be lower than what you currently pay on the home loan being refinanced and you don’t plan on giving up either home soon. Just be prepared for higher new monthly payments if the loan is bigger than the previous one.
Final Thoughts on Using a Home Equity Loan to Buy Another Property
If you have enough equity built up in your home, you can use a home equity loan to buy your next property. Be sure to shop around to get the best deal on the real estate to purchase, mortgage, and home equity loan. Making the required monthly payments on time on all loans is the best way to stay on track and avoid foreclosure.
About the Author
Camron Hoorfar is a licensed attorney with extensive experience in bankruptcy, consumer debt, tax, litigation, criminal laws, business laws, and non-profit organizations. He is also the spokesperson of DebtConsolidationCare.com – the Internet’s first get out of debt community.
