A home equity loan can be used to purchase a house. However, it is not always the best decision. With caveats, home equity can be used to purchase a second or investment property.
A home equity loan allows you to access the equity in your home by taking out a second mortgage. Home equity is the difference between your home’s value and what you owe.
There are two things you should know if you want to use your equity from your home to purchase another property. Is this a purchase of a second house or an investment?
A home equity loan is a great option if you are looking to purchase an investment property.
You can contribute more to your down payment. You can put more towards your down payment with a home equity loan. You will be more competitive in the current market and your monthly payments and interest rates will be lower.
A second property can be more difficult to finance due to the higher down payment requirements. A home equity loan is a better option and can be more affordable.
Home equity loans are secured by collateral which is your home. You will enjoy lower interest rates as a result.
Your home equity could be an asset in wealth building if you are looking to buy an investment property. You should consider the fact that a second house will not bring you income as an investment. This means you will be borrowing money to buy your second home.
There are downsides to using equity to purchase investment properties. You are effectively trading an asset for debt. You are taking the portion of your home you own and then putting it in a loan.
Housing market shifts can make you vulnerable, especially if you have two properties. If something happens in the housing markets, you’re at double your risk. If your property’s value falls, for example, you could owe more on both your home equity loan or your mortgage.
You could lose both your properties if you default on your loan.
It is possible to end up with three mortgages and only two homes. You will need to combine the home equity loan with the loan for your second house.
A downside to consider is that the interest on your home equity loan won’t be tax-deductible due to 2018 tax code changes.
This is the big takeaway: Yes, you can use your home equity to purchase a second home. Sometimes it’s a good option. However, it comes with risks. It’s not always the best decision. You need to carefully consider your particular situation.