Can you use a home equity loan to buy another house? The short answer is yes, although the advantages and disadvantages of this course of action may depend on what the second property is used for.
If you’re considering using home equity to buy a second house, there’s one important question to ask yourself: Are you buying this property as a second home or as an investment?
Using a Home Equity Loan to buy a Second Home or an Investment Property
A home equity loan can make buying a second property less expensive and give more liquidity to the buyer. When using home equity specifically to buy an investment property, there are a few distinct advantages.
- Increase your Down Payment A home equity loans (HELOC) are received in a lump sum payment, giving you more cash to use toward your next property. By choosing to put more of that money toward your down payment, you can potentially lower your monthly payments and interest rates.
- Settling Financial Difficulties Lenders spend less time originating home equity loans, which may save you money, as it typically means lower fees and closing costs. But perhaps the biggest advantage of this option is the potential to lower your interest rates.
- Home equity loans offer lower interest rates because they are secured by collateral in the form of real estate. This means by utilizing a home equity loan, you can avoid the hefty interest rates you would encounter through other forms of financing, like hard money and personal loans.
Does a Home Equity Loan (HELOC) require an appraisal?
Lenders set their own policies in this regard. In most cases, they want to independently confirm the market value of your property before approving your application. However, they usually use alternative methods for determining your home’s value. Full appraisals often aren’t a firm requirement.
Can you get a HELOC if your home is paid for?
In short, yes. If your house is paid off, your home equity is at 100%. This could actually work to your advantage, as lenders may consider you a lower-risk borrower given your history of successfully paying off major loans.
Pros of using a HELOC for a second home
- Flexible access to revolving credit which can be used again and again
- Interest rates and closing costs are often lower than comparable alternatives
- You only pay interest on the money you actually use
Header photo by Ketut Subiyanto from Pexels
