There are numerous reasons to consider purchasing a second home, such as a holiday house for your children or short-term rental income, a fix-and-flip property, or a long-term real estate investment. In some situations, you can use your home equity loan to purchase a new property.
Qualifying borrowers can leverage the equity in their present home to acquire another house, but there are several criteria to consider first. Here’s an overview of ways you can use home equity loans for a second home investment.
Can We Use A Home Equity Loan To Buy A Second Home?
It is vital to have quick access to finances when purchasing a second home in competitive real estate markets. The answer is yes if you’re wondering if you can use your equity to purchase another house. A homeowner’s equity loan is a low-cost, handy solution to fund your buy and finance a significant percentage of your down payment.
Two types of mortgages can be used to access the equity in your primary home, which is the amount of the property you possess relative to what you still pay on your mortgage loan. The first is a home equity loan, while the second is a home equity line of credit or HELOC.
Home Equity Loan Financing For A Second Home
A home equity loan is a lump sum of money you can borrow using the equity in the property as collateral. Home equity loans often include a set interest rate and preset monthly installments for 20-30 years. Because home equity loans are one-time, significant deposits, you can utilize the money as you see appropriate. This includes using it to put down a financial asset or a new home.
Notably, most standard mortgage lenders will not enable you to finance any portion of the down payment. However, portfolio lenders often allow you to take the down payment, so you utilize a portfolio lender to fund the first 75% to 80% of the retail price and an equity loan to cover the last 20% to 30% of the sales price.
However, there are some drawbacks to home equity loans. Lenders demand greater interest rates on second mortgages compared to first-lien loans. Moreover, they do not offer you repayment flexibility to pay back at your convenience because they are fixed installment loans.
HELOC To Finance A Second Home
A HELOC is a revolving credit line with a set financial limit that you can use to finance a second property. A defined draw period exists during which money can be withdrawn. The loan also has a set repayment time, often 10-20 years, during which the debtor completes the loan’s repayment. Monthly payments may fluctuate and grow as the repayment period progresses because HELOC interest sometimes fluctuates based on the economy’s national state.
While house flipping or employing the BRRRR approach, many real estate agents use HELOCs to finance the down payments or remodeling costs. For example, you may utilize a hard currency loan to pay 70% to 80% of the purchase cost and 100% of the cost of repairs and remodeling and then use your HELOC to pay the remaining 20% to 30%. You get your down payment back and, therefore, can repay your HELOC after reselling or financing the home after renovation. It’s a tried-and-true method for flipping houses with no cash down.
Refinance with Cash Out
With a cash-out refinance, you rewrite your mortgage loan for a sum greater than what you already owe. Then you may take that additional cash and pay it back with your mortgage. You can refinance your initial mortgage loan for the cumulative $450,000 to purchase a second property if you hold a $300,000 loan and wish to raise $150,000 for it. Cash-out refinancing may be helpful if you already want to refinance your loan due to falling interest rates or a shorter amortization period.
Final Words
An excellent way to buy a second home is by using the equity in your current home. You can benefit from cheaper interest rates and larger down payments even though it has hazards similar to any type of debt. So, take care not to put a lot of stress on yourself. Down payments not only safeguard the lender but also lessen the possibility of negative cash flow or going into foreclosure on a home. Before purchasing any property, always assess your cash-on-cash gain and make conservative assumptions to prevent losing money instead of making it.
