Can you buy a second home with the equity in your current Albuquerque home? As long as you’re strategic, you may be able to build long-term wealth with equity in your home.
Equity can be captured in many ways to build wealth. You can, for instance, pay off higher-interest debt or make home improvements that boost your home’s value. Investing in the stock market or starting a business can yield significant returns over the interest you pay on your loan.
The next question people often ask is whether or not they can use the equity in their home to purchase another home.
Can You Use a Home Equity Loan to Buy a House?
Yes, in a nutshell. A home equity loan can be used to buy a house, but that doesn’t mean it’s always the right choice. With caveats, home equity can be used to buy a second home or an investment property.
Home equity loans are second mortgages that allow you to borrow against the equity you have built in your home. Equity in a home is the difference between what you owe and what it is worth.
There is a distinction you need to make before using your home’s equity to buy another house. Do you plan to buy a second home or an investment property?
An investment property can be more affordable and more liquid with a home equity loan. Benefits of using equity to buy an investment property include:
- Your down payment can be increased. You can use your home equity loan to pay for a down payment by receiving a lump sum payment. The interest rate and monthly payment will be lower, and you’ll be a more competitive buyer.
- Since there are more stringent down payment requirements for a second property, a home equity loan may be a more affordable and convenient solution.
- Your current home serves as collateral for a home equity loan. Consequently, interest rates are lower for you.
You can build wealth by using your home equity to purchase an investment property. You should consider that a second home won’t bring in income like an investment. As a result, you’ll be tying your home up in a loan and taking on another loan, so you need to be financially sound.
The downsides of using equity to buy an investment property do exist. These include:
- You’re exchanging an asset for a debt. It’s taking what you own out of your house and putting it into a loan. You will end up with a higher debt, regardless of the specifics. Is that what you want?
- When you own two properties instead of one, you’re more vulnerable to housing market shifts. When something goes wrong in the housing market, your risk doubles. Your home equity loan and mortgage might be overextended if the value of either of your properties drops.
- Both properties could be lost if you default on your loan.
- There is a possibility that you will end up with three mortgages but only two homes. Home equity loans are usually second mortgages, so you must combine them with your second mortgage loan.
- Due to the 2018 changes in tax codes, interest payments on your home equity loan will probably not be deductible.
The most important point to remember here is that there are times when it can be very beneficial to use home equity to purchase a second home. At the same time, there are risks and it’s not always the right decision, so you need to go over the details in your specific situation carefully.
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