Buying a home is one of the biggest financial investments you’ll ever undertake. As you make monthly mortgage payments and work down your loan balance, you build equity in your home. Many homeowners wonder if they can use this equity to buy another house.
The short answer is yes, but doing so comes with some risks. Discover whether using a home equity loan to buy another house is right for you by learning the requirements to qualify, the process of applying, and the pros and cons of going this route.
What is a Home Equity Loan?
A home equity loan allows you to borrow money against the equity in your home. The loan amount you qualify for is typically based on the equity you’ve accumulated and your financial standing. Home equity loans usually have fixed interest rates, meaning your monthly payments will remain the same for the life of the loan. Repayment terms start at five years and may stretch up to 30 years, depending on your lender.
Home Equity Loan vs. Line of Credit
A home equity line of credit (HELOC) is another option for homeowners looking to borrow against their home equity. While a home equity loan is a lump sum repaid over a set period, a HELOC is a revolving line of credit you can draw upon as needed. The interest rates on a HELOC are usually variable, meaning they can change over time, and the repayment terms are typically 10 to 20 years.
Home Equity Loan Requirements
To qualify for a home equity loan, you must have a certain amount of equity in your home. Lenders typically want borrowers to have at least 15 to 20 percent equity, though the minimum requirement is sometimes higher than this. You also need a good credit score—preferably 620 or higher—and a steady income to be approved for a home equity loan. Lenders also consider your debt-to-income (DTI) ratio to determine your ability to repay the loan.
How to Get a Home Equity Loan to Buy Another House
If you’re interested in using a home equity loan to buy another house, follow these steps:
- Determine how much to borrow: Before applying, you should have a clear idea of how much money you need to buy the other house. Most lenders let you access up to 85 percent of your home equity. For instance, if your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity. In this case, you can borrow up to $85,000. The exact amount you can borrow depends on the results of a home appraisal.
- Compare lenders: When taking out a home equity loan, you aren’t required to borrow from your current bank or mortgage company. Shop around and compare rates and fees from different lenders to find the best deal.
- Complete your loan application: Gather all the necessary documentation—including proof of income, bank statements, employment information, outstanding debts, and credit score—so you have everything you need when you sit down to fill out your application. You can do this online or in person at your lender’s location.
- Close on the loan: If you’re approved, you must close to finalize the loan. This typically involves signing a promissory note and other loan documents. Thanks to the federal three-day cancellation rule, you can back out of the agreement without penalty up to three days after signing.
Pros and Cons of Using Your Home Equity to Buy Another House
Tapping into your home equity is an excellent option in many cases, but it also comes with risks. Here are the pros and cons to consider before signing a loan agreement.
- Lower interest rates than other forms of borrowing: Home equity loans usually have lower interest rates than unsecured loans like personal loans or credit cards.
- Tax benefits: The interest you pay on a home equity loan may be tax-deductible, lowering your overall tax burden. Consult a tax professional to fully understand the tax implications of home equity loans.
- Free up your cash: Using your home equity to buy another house keeps cash in your pocket that you would otherwise have to use for the home purchase. This frees up money for emergencies or other investments.
- Opportunity to diversify your portfolio: Buying another property can potentially provide a source of passive income and diversify your assets. You may also benefit from appreciating property values over time.
- Fund improvements to the second house: You may be able to use a home equity loan to upgrade the property you buy, increasing its value and making it easier to sell or rent.
- Risk of foreclosure: Using your home equity to buy another house puts your primary home at risk if you’re unable to make payments on the loan.
- Increased debt: Taking out a home equity loan increases your debt, which may be a financial burden.
- Higher monthly payments: The interest rate on your home equity loan will likely be higher than your current mortgage, raising your monthly payments and possibly straining your budget.
- Fees and closing costs: When you use a home equity loan to buy another house, you must pay fees and closing costs, which average 2 to 5 percent of the loan amount.
- Lower equity: A home equity loan puts a dent in your home equity, which could make it harder to sell or refinance in the future.
Apply for a Home Equity Loan in Oklahoma
Are you looking to fund a second home purchase in Oklahoma? Turn to Financial Concepts Mortgage for flexible, affordable loan options. As the region’s premier mortgage lender, our goal is to form lasting relationships with our clients. We’re here for you throughout the initial application process and will continue to offer support if your home loan needs change. When you’re ready to apply, please contact us online or call (405) 722-5626 to speak directly with an experienced loan officer.