Did you know that the average household in America has a net worth of $692,100? Does that number seem a little off to you?
It did to us at first, but one of the main reasons it is so high is that many Americans have way more equity sitting around, unused than they realize.
Using equity to purchase a second home is one of the best ways to purchase a second home. Here’s what you need to know.
Using Equity to Purchase a Second Home
Using equity to buy a second home is one of the easiest and most cost-effective ways to purchase another piece of real estate. Often, the terms on an equity loan will be more appealing to a buyer than a typical mortgage. But just as any financial opportunity, there are many pros and cons.
Benefits of Using Equity to Purchase a Second Home
Ultimately, using equity allows you to buy a home at a discounted rate when compared to taking out a personal loan. There are lower average interest rates, fees, and closing costs.
One of the biggest benefits of using equity to purchase a second property is that you don’t have to diminish the value of your investment portfolio or long term savings. Using equity as a loan or line of credit allows you to expand your assets, without diminishing your savings or other investments.
If you’re using the second home as a rental property, having smaller monthly payments will increase your profit. It also decreases the risk involved if there is a downturn in the market you serve.
Risks of Using Equity to Purchase a Second Home
Like all real estate purchases, there is the risk that the property you buy won’t pay for itself, or even worse, that it will decline in value. This means that not only is the investment a loss, but you will have to pay the difference back to the bank.
Equity takes significant time to repay and build back. Refinancing and selling the second property are the only ways to make a profit fast on the investment.
How to Buy a House Using Equity
There are four major ways to finance a second home using an existing home’s equity. We’ve listed them below:
- Home Equity Line of Credit: This is an open-ended credit line referred to as a HELOC. It works like a credit card, where you can borrow and repay funds to an open line of credit. This is commonly used in “house flipping” because you can use the line of credit to pay for renovations too.
- Second Mortgage: This option is also called a fixed-rate home equity loan. This type of loan is paid back in large sums on designated due dates and must be paid back in full at the end of the loan term.
- Cash-Out Refinance: With this type of financing you can refinance the remaining mortgage balance of your first home at the market interest rate or rewrite the balance of your first home’s loan for a larger amount, to cover the cost of the second home.
- Reverse Mortgage: This financing is also called a Home Equity Conversion Mortgage and is available to homeowners who are 62 and older. These types of loans have higher fees but offer more flexibility and higher cash flow.