Buying a second home is a dream come true for many. Whether it’s a retirement home, a vacation home, or your first step toward real estate, investing in a second property is a notable achievement in your portfolio. Like a first-time home purchase, a second property requires a down payment, and many consider using their home equity as seed money for funding the investment.
The short answer to whether you can use your home equity to buy another home is yes, you can. Let’s look at the whole process to see how this works.
Before using your equity to buy your second home, determine how much you need for the down payment and closing costs. Next, determine how much you have in equity. Keep in mind that you can only use 85% of the equity on your home. So if your home is worth $450k and you still owe $350k, that means that you have $100k in equity and up to $85k available to borrow as a home equity loan.
You’ll need to qualify for a home equity loan to access the funds. Lenders will check your credit score, income, and other outstanding debts before you get approved for your second mortgage. Prepare the needed documents –similar to how you did with your first loan –to show your current financial information to make the process faster.
After preparing documents for your loan application, you can now discuss the best terms and rates you can with your mortgage professional. Ask about fees and closing costs so that you’ll know what to expect. Once you’ve picked the loan with the best terms, you can now apply.
Next, an appraisal of your home will be ordered to determine the current value. Once the appraisal and necessary documentation is received, you quickly expect an answer, and your funds will be distributed in one lump sum.
Home equity loans have fixed and lower interest rates than other unsecured loans since you use your home as collateral. Terms are also longer than most consumer loans.
You can access funds at once in a lump sum, and there are no restrictions on how you can use the money.
The chances of getting approved are higher with a home equity loan than with an additional mortgage. This type of loan is less risky for lenders since borrowers prioritize their primary residence.
A home equity loan keeps cash in your pocket.
Buying a second home with equity allows you to make a larger down payment or pay the whole amount, giving you the buying power of a cash buyer.
Owning a second home can enrich your life in many ways. Gone are the days when second homes are reserved for the wealthy. All homeowners can now enjoy added income potential, more quality time with family, and long-lasting memories of buying a second home.
Get in touch with our loan experts before starting your search for your second property.
Jeff Lazerson - Mortgage Columnist since 2011