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If you’ve owned a home for the past few years, you’ve likely seen a significant increase in your home’s equity. There are several ways you can tap your home equity to fund other purchases or even an upgrade to a new home. A key way to use your current home’s equity to buy another home through a home equity loan. With this type of loan, you’ll receive the funds as a lump sum to use as you wish—such as to purchase a second home or investment property. However, using a home equity loan to buy another house also comes with risks. Just like a regular mortgage, a home equity loan uses your home as collateral—meaning the bank could seize it if you severely default on your payments. Additionally, each lender has its own eligibility criteria when it comes to getting approved for a home equity loan and a mortgage on the second home, if needed. For example, some lenders might not be willing to approve you if you’re using a home equity loan to cover your down payment. Here are things to consider if you want to use a home equity loan to purchase a new home. What Is a Home Equity Loan?A home equity loan is a type of fixed-rate loan that’s secured by your home. You can generally borrow up to 80% of your home’s equity through a home equity loan, depending on the lender. Unlike with a home equity line of credit (HELOC) that allows you to repeatedly draw on and pay off your credit line, you’ll receive your home equity loan funds as a lump sum. You’ll then pay this amount back in equal installments over your repayment term—usually five to 30 years, depending on the lender. Because a home equity loan is secured by your house, it’s seen as less risky to the lender—so they tend to offer a lower interest rate compared to other types of loans. Your rate will also depend on other factors, such as your credit, income and debt-to-income (DTI) ratio. Using a Home Equity Loan To Buy a Second PropertyWhile you can use a home equity loan to buy a second property, it’s important to consider whether you’ll be putting the funds toward another home or an investment property. Here are some pros and cons to keep in mind if you’re buying a second property: Pros to Using A Home Equity Loan to Buy A Second Home
Cons to Using A Home Equity Loan to Buy A Second Home
Using a Home Equity Loan To Buy an Investment PropertyBuying an investment property through a home equity loan is different and sometimes more complicated than using the same type of loan for a second home. This is mainly because investment properties are seen as more risky by the lender, so you’ll typically face higher requirements (and costs) when you seek financing for such a property. Consider these pros and cons before using a home equity loan to buy an investment property: Pros to Using a Home Equity Loan to Purchase an Investment Property
Cons to Using a Home Equity Loan to Purchase an Investment Property
Alternative Financing Options To Buy Another HouseIf using a home equity loan to buy another house doesn’t seem like the right fit for your needs, here are some other options to consider: Cash SavingsIf you already have a significant sum squirreled away in a savings account, it might be a good idea to use it as a down payment to avoid taking on more debt. However, doing so will deplete your cash reserves and could leave you financially vulnerable when it comes to unexpected expenses. Cash-out RefinanceWith a cash-out refinance, you’ll take out a mortgage for a higher amount than what you owe on your home. You’ll then use these funds to pay off your existing mortgage, leaving you with the extra amount—minus any closing costs—to use how you wish. Keep in mind that you’ll generally need a credit score of at least 620 to get approved for cash-out refinancing—though if you want to qualify for the best rates available, you’ll likely need a score of 700 or higher. Remember that because you’re paying off your old mortgage with a larger loan, your monthly payments will increase. Personal LoanA personal loan can typically be used to cover almost any personal expense—including home purchases in some cases. Unlike home equity loans, most personal loans are unsecured, which means you don’t have to worry about collateral. But because there’s more risk involved for the lender, you’ll likely end up with a higher interest rate on a personal loan than on a home equity loan. Additionally, while you might be able to borrow up to $100,000 or more with a personal loan, depending on the lender, this might not be enough to fully cover the cost of a new home or even a down payment. Hard Money LoanIf you’re buying an investment property, you might consider taking out a hard money loan. This type of loan is short-term, asset-based financing—meaning it’s secured by real property. To be eligible, the property you’re purchasing typically must be distressed and in some stage of disrepair. With a hard money loan, the property you plan to buy will be used as collateral for the loan, and your loan amount will depend on how much the lender expects the property to be worth after it’s renovated. Hard money loans also tend to have a much quicker turnaround time, which could make them a good option if you need the cash quickly. However, keep in mind that these loans are riskier and generally not offered by commercial banks—instead, you’ll have to work with a private company or individual. This added risk to the lender also means that interest rates are usually higher compared to what you’d get with a traditional loan. Helping You Make Smart Mortgage & Real Estate Decisions Get Forbes Advisor’s ratings of the best mortgage lenders, advice on where to find the lowest mortgage or refinance rates, and other tips for buying and selling real estate. Thanks & Welcome to the Forbes Advisor Community! By providing my email I agree to receive Forbes Advisor promotions, offers and additional Forbes Marketplace services. Please see our Privacy Policy for more information and details on how to opt out. Is it smart to use a HELOC to buy a house?A HELOC is a great option for short-term cash needs, especially if you're going to pay it off quickly. But if you're using a HELOC to buy a home — which you can do by having a HELOC be a second mortgage — and you don't intend to pay it off quickly, you may want to consider a fixed-rate second mortgage.
Can I use my equity to buy another house?Yes, if you have enough equity in your current home, you can use the money from a home equity loan to make a down payment on another home—or even buy another home outright without a mortgage.
What credit score is needed for a home equity?Credit score: At least 620
In many cases, lenders will set a minimum credit score of 620 to qualify for a home equity loan — though the limit can be as high as 660 or 680 in some cases. However, there may still be options for home equity loans with bad credit.
How much of a line of credit can I get against my house?To qualify for a HELOC, you need to have available equity in your home, meaning that the amount you owe on your home must be less than the value of your home. You can typically borrow up to 85% of the value of your home minus the amount you owe.
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