Looking to buy a new home but struggling to gather funds? Did you know you can use equity to make your dream come true? Read on to learn how to do it
Did you know your home equity –– the product of months (or years, or decades) of mortgage payment and the downpayment you pinched pennies to afford –– can be used even before you sell your home?
While many homeowners may think this equity is effectively tied up until their home has sold, home equity can be accessed through a number of financial tools, like a home equity loan or home equity line of credit (HELOC). Once this equity is accessed, there are virtually innumerable ways homeowners can spend it. With this chunk of cash, homeowners can tackle costly home repairs, pay down high-interest loans, or even invest. But what about using home equity to purchase a new home? You might be surprised to hear this is another potential use for your valuable home equity.
Discover more on how to use equity to buy another property and some pitfalls to avoid should you go this route.
Those contemplating using equity to buy a second home are likely doing so for two reasons: as a second home or a rental property. As we’ll discuss below, the tools for accessing home equity can be used for either purpose. Still, it’s important to know what function this second property will serve before you explore ways of accessing home equity. If you’re considering using home equity to buy an investment property, understanding current market conditions will be crucial to be sure your investment is sound.
To buy a home using your home equity, you must first access said equity –– which is also done through either a home equity loan or a HELOC. Both of these tools have their own set of pros and cons, and we’ve compared HELOCs vs. home equity loans at length. For the purpose of buying a second property, here’s a brief overview of the benefits and limitations of each.
So, what is a home equity loan?
A downpayment presents a potentially massive upfront cost for potential home buyers and, whether you’re purchasing your second home or your fourth, this chunk of change can be hard on the wallet. If you don’t have up to 20 percent of the total cost of your home in the bank, a home equity loan can be a quick and easy way to free up this cash –– or add to what savings you already have, thus lowering your existing mortgage payment and potentially your interest rate.
But while a home equity loan can make the home-buying process easier, in doing so you’re borrowing money against your current home to pay for a new one. This can be too big a risk for some homebuyers, who may be unwilling to bet their investment on a second property. With the current housing market in a state of flux, and real estate experts still not entirely certain of what will happen to home prices (or interest rates) next, investing in a second property without risking your existing home may be a safer bet.1 Further, given that potentially hefty interest payments accompany the funds from a home equity loan, you may find yourself saddled with interest fees and renovation costs if your investment property desperately needs some TLC.
With a home equity loan, borrowers access their full loan amount in one fell swoop. But with a home equity line of credit, they can draw from their available credit over a given length of time –– offering added flexibility to homebuyers who may not know exactly what their next property will cost. As we mentioned above, those eyeing a potential rental property may benefit the most from rolling home equity into a second home, and the flexibility of a HELOC can allow for an investment in a downpayment now and renovations down the road.
Where the HELOC falls short, however, is in its variable interest rate. While most home equity loans carry a fixed interest rate, meaning borrowers know exactly what they’re getting into, this variable interest rate can mean an unpleasant surprise down the road.2 With your home’s equity on the line, we won’t fault you for wanting a sure thing –– that a HELOC simply can’t provide.
If we’ve made it sound like accessing your home equity is as simple as making an ATM withdrawal, it’s not –– whether you choose a home equity loan or a HELOC. There are equity requirements for either of these approaches, and you’ll want to be sure you have accrued enough usable equity to qualify for each before you schedule that home tour.
But that’s not all: these approaches have credit requirements, too. To qualify for a home equity loan or a home equity line of credit, borrowers should own 15 percent or more of their current home outright and have a credit score in the mid-600s.3 We should note, however, that these requirements will vary from lender to lender, and having a higher credit score and equity percentage will pay off when it comes to your interest rate.
Home equity loans and HELOCs can be great ways for the right homeowner to access the home equity needed to buy a second property. With that said, the limitations of each and the potential risks involved may be more than enough to discourage would-be buyers. Fortunately, there are other ways to access home equity.
Truehold's sell and stay transaction is one such method. Through our sell and stay transaction, a homeowner can sell their home and then receive the home equity they’ve earned over the years. Then, they can rent the home back, continuing to live in the place where they’re most comfortable. And as for this equity, it can be used to make life more comfortable through home renovations, make life more exciting through travel, or be put toward the purchase of the home of your dreams. Ultimately, if you want to tap into your home equity, you may find Truehold’s sell and stay transaction is the best way to do so.
Contact us to explore our sell and stay transaction and learn more about freeing up your home equity.
Sources:
1. Forbes. Housing Market Predictions for 2023. https://www.forbes.com/advisor/mortgages/real-estate/housing-market-predictions/
2. Credible. What to Know About HELOC Interest Rates.https://www.credible.com/blog/mortgages/heloc-variable-rate-history/
3. Bankrate. Requirements for a home equity loan or HELOC in 2023. https://www.bankrate.com/home-equity/requirements-to-borrow-from-home-equity/
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