Can I Use a Home Equity Loan To Buy Another House?

If you have a substantial amount of equity in your main home, you can take advantage of it with a house equity financing. You can then use that money for any function you wish, consisting of purchasing a second home or an investment property.

However, utilizing a home equity lending to buy another house is not without dangers. It’s wise to recognize the advantages and disadvantages before you proceed.

Using a Home Equity Loan To Buy Another House

The short answer to the concern of whether you can make use of a home equity funding to acquire one more home is yes, you normally can. Remember, nevertheless, that some lending institutions may have limitations on the source of your deposit and may not agree to provide a mortgage on the brand-new house if you’re making use of a home equity loan for that purpose. Naturally, that will not be a problem if you are paying all cash for the new residence.

Unlike a home equity line of credit (HELOC), which provides a rotating credit line, a home equity car loan offers you the entire car loan quantity in advance. The quantity will certainly depend on how much equity you have in your residence, its market value, and also just how much you intend to borrow. Your revenue as well as credit history will also impact the lending quantity. Most loan providers will certainly cover the total amount at a percent (normally 85%) of the home’s worth. When your home equity loan closes, you’ll receive the complete proceeds as well as can then invest the money to buy one more residence or do whatever you want with it.

Pros and Cons of Using a Home Equity Loan To Buy Another House

The significant advantage of using a house equity funding to acquire a 2nd home is that it might be your ideal (or only) considerable source of funding if you find yourself house-rich however cash-poor. One more possibility plus is that rates of interest on house equity finances often will be lower than various other types of borrowing, though they are typically more than interest rates on a home mortgage.

The most significant downside of using a house equity finance for buying an additional home– or for any other function– is that you are putting your primary residence in jeopardy due to the fact that it serves as security to protect the lending. If you find yourself unable to make the payments on your home equity loan, the lender could foreclose on your home and evict you.

An additional threat is that by tackling a residence equity finance, especially if you still owe money on your very first mortgage, you can find yourself bewildered by financial obligation if you encounter an unanticipated economic reversal, such as a job loss or big clinical expenses. Without a doubt, you could end up obligated to pay off three home loans at the same time: the rest of the home mortgage on your key home, a home loan on your 2nd residence (if your car loan isn’t large sufficient to buy your house outright), and also your house equity funding.

Finally, an additional downside is that you’ll have to pay closing prices on the residence equity car loan, which could be 2% to 5% of the total loan price.

Alternatives To Using a Home Equity Loan to Buy Another House

Alternatives To Making Use Of a Residence Equity Lending to Acquire One More House
Prior to you get a home equity funding to buy an additional house, it’s worth considering the alternatives. They, too, have advantages as well as downsides.


The very best source of cash to acquire an additional residence would certainly be cash that you have actually currently conserved as well as for which you have nothing else prompt demand. Obviously, if you have that, you shouldn’t be seeking a car loan at all.

Retirement savings

Your retirement cost savings are a possibility. If you have a 401( k) plan at the office, for example, your company may enable you to borrow a part of it with a 401( k) loan. Like home equity finances, retirement lendings can be risky. You’ll typically need to repay the finance within five years– also faster if you shed your job. If you can not pay it back, then you’ll owe earnings tax obligations and also feasible penalties

Personal loan

You can think about a personal funding. You’ll pay a higher rates of interest than with a residence equity car loan or a HELOC, but if the individual car loan is unsafe, your house will not be at danger if you fall behind on repayments.

Cash-out refinance

A cash-out re-finance settles your existing home loan with a larger one based on the collected equity in your home. You can then utilize the added money for other objectives. Naturally, you’ll now have even more financial obligation as well as higher regular monthly mortgage repayments. These lendings additionally have high closing expenses.

Home equity line of credit (HELOC)

Using a HELOC to purchase a financial investment home, rental home, or second residence can offer you a lot more adaptability than you get with a house equity financing, because you do not have to take the money simultaneously. This might be beneficial if you need some cash money now for a deposit and also anticipate to require extra in a year or two to make some renovations. Nevertheless, HELOCs normally bring variable interest rates, making them less predictable than a residence equity funding, which usually has a fixed price.

Reverse mortgage

If you are age 62 or older as well as seeking to become a property manager in your retirement, you could obtain a government insured house equity conversion mortgage (HECM), a federally backed reverse home loan, to get a residential property that includes rental apartment or condos to offer you with an income stream in your later years. Another option is to purchase a new single-family house or condominium with the reverse home mortgage and also lease your previous residence. The reason: You must live in the house on which you have a reverse home loan.

An HECM transforms the equity in your home into cash money that is typically free of tax and also does not affect your Social Security as well as Medicare. The lending institution pays you the money, as well as you don’t have any type of regular monthly settlements on the home mortgage. Indeed, as long as you live in the home, you don’t need to pay off the home mortgage whatsoever, though you still should pay the expenses of keeping your house. Nevertheless, when you vacate the house, sell the house, or pass away, then you, your spouse, or your estate should repay the home loan completely, plus interest from a variable rate that accumulates over the life of the financing and also consumes the home’s equity.

This means that if you intend on leaving your residence to your successors, there would be a significant costs for being able to do so. Still, at that point, the profits from the sale of any rental residential property you own could potentially settle the reverse home mortgage.

Can You Use a Home Equity Loan To Make a Down Payment on a Home?

Yes, if you have enough equity in your current home, you can use the money from a house equity funding to make a deposit on one more home– or even purchase an additional house outright without a home loan. Note that not all loan providers enable this, so if you’re intending to get the second house with cash from a home mortgage, you may need to look around to discover one that does.

How Much Money Can You Get From a Home Equity Loan?

Normally, you can borrow as long as 85% of your residence equity. However, you might need to pay several thousand bucks in closing expenses, so you will not leave the manage the full 85%.

What Are the Risks of Using a Home Equity Loan to Buy Another House?

The significant threat of a home equity lending, as with a normal home loan, is that it is secured by your house. This suggests that if you are not able to stay on par with the payments, your loan provider might take the residence, offer it, as well as evict you. Rather than a home equity loan, you likewise might be eligible for an unsecured personal lending, which will not place your residence in jeopardy yet will normally have a greater interest rate.

Which Is Better: A Home Equity Loan or a Home Equity Line of Credit (HELOC)?

That depends upon why you require the money. A house equity car loan might be much better if you require a round figure of cash at a certain time– such as to acquire an additional residence. A residence equity line of credit (HELOC) could be far better if you don’t need the money simultaneously yet expect to invest it in phases. Some credit lines remain open for as long as ten years.

From an interest-rate point of view, a house equity finance might be more secure because its interest rate is taken care of, while the price on a HELOC varies. Consumers with HELOCs have some security in the form of caps on exactly how promptly their rate of interest can climb, although that can vary from lender to lender.

The Bottom Line

If you have sufficient equity in your home, it’s possible to make use of a residence equity finance to buy an additional home. One major downside to think about is that if you’re unable to stay on par with car loan repayments, you might lose your house. A HELOC, personal lending, or cash-out re-finance are amongst the options to achieve the very same goal and, for some borrowers, may be a far better fit. Each has advantages as well as drawbacks.