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


Can I Use a Home Equity Loan To Buy Another House

So you want to buy another house but cash is short. And you've heard about home equity loans. But are they right for you? Is there a better way to buy?

Here are two options for using your equity in your current home to buy another one. One is to sell and then buy, which converts equity into cash, and the other option is to take out a home equity loan. You may ask "Can I use a home equity loan to buy another house?"

The answer depends on how much money you need, where you live, the state of the housing market in your area, and if you have other assets that can be used as collateral.

Let's take a closer look!

What Is a Home Equity Loan?

A home equity loan is a type of mortgage that is secured by your house.

It can be for any amount you choose, providing the home equity loan plus your original mortgage doesn't exceed the maximum loan to valuation ratios. These are usually set at 80% of your home's value, but this may vary depending on the lender.

Borrow or Sell: What Are the Important Factors?

It's hard to know which option you should choose and there are pros and cons for each. The answer depends on:

  • How much money you need
  • Your credit score
  • Your income
  • The state of the housing market in your area
  • What you are looking to achieve

How Much Money Do You Need?

To consider borrowing on your existing home versus selling, you need to assess how much money you need. If the amount is not very high or your credit score isn't good enough for a loan, then it would make more sense to sell and buy another property.

But if the amount of money is quite large and you have a poor credit rating, then taking out home equity finance may be helpful.

Before you can decide if a home equity loan is a good option you do need to get an appraisal to see how large your loan could be.

What's Your Credit Score?

A low score can create problems in getting approved for a home equity loan. If your credit is good enough, then taking out the loan may be an option. But if your credit score is so bad that you are denied a home equity loan, then it's better to sell and buy again.

What's Your Income?

If you have enough income or the ability to generate an income in the future (such as from rental property), then taking out a home equity mortgage may be worth considering. Interest rates are lower when you offer a house as security.

Homeowners have many different ways of using their home's equity. You can take out a mortgage, refinance, get a reverse mortgage, or even borrow against the value of your property.

Can Your Income Support More Mortgage Repayments?

Can I use a home equity loan to buy another house?

Homeowners have many different ways of using their home's equity. You can take out a mortgage, refinance, get a reverse mortgage, or even borrow against the value of your property.

The biggest factor in deciding if you should take out a home equity loan is how much it will cost. People seem to underestimate expenses and overestimate income. Do your sums and double-check them so you know exactly what extra costs you are in for. You do not always make positive cash flow on financing a rental property.

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

If you use a home equity loan to buy another house, you are getting that house with 100% debt. Part of the new debt is assigned to your original house.

You need to take into consideration the cost of both mortgages and whether your income can support the extra mortgage repayments. It is important that these figures will work for you as well as your family. Having a realistic idea of how much your repayments will be is essential to work out affordability. It is necessary to not overextend yourself financially.

Some people take out a HELOC (home equity line of credit) when getting a home equity loan. This works similarly to a credit card where they have a drawing limit but don't need to draw all the funds down immediately. You can make use of funds as you need them.

This reduces the interest you pay on your loan, which makes it more affordable.

Your Local Housing Market

Where you are in the housing market will affect your decision to sell or buy.

If you're a first-time homeowner with little equity it may not be possible to get a home equity loan. Equity should increase over time and getting into debt now would not be wise.

Before deciding to take a loan to buy another house, it is prudent to get a feel for what is likely to happen to local property.

Is demand for property increasing? What is the current value of your house? Has COVID-19 caused stress in the property market? Do you have an exit strategy if the housing market turns against you?

Can I Buy a Second House and Rent the First?

You may be able to buy a second house if you plan on renting the first one. You should get your mortgage pre-approved so there are no surprises when buying your next house.

You also need to ensure the mortgage on your existing home is not an owner-occupied mortgage. If it is you will need to contact your mortgage provider and make sure the mortgage can be varied to allow you to rent the property out. This will entail fees and result in a higher mortgage rate. This reduces affordability.

If the mortgage provider does not agree to vary the terms on an owner-occupied mortgage, then you would need to refinance the original mortgage as well as getting the new mortgage. Some lenders may not be comfortable increasing their exposure in these circumstances.

Should I Sell My House?

If you're looking at whether selling your house is better than using home equity, the answer is complicated. You must factor in a few major points before making a decision one way or another.

Homeowners who are considering selling their homes versus refinancing all have a common thread. They feel that it might be better for them and their family to use the money from the sale of their home to buy another house. Or they're looking to downsize and live someplace where the cost of living is more manageable.

Others may want to get out from under a mortgage that has become unmanageable with payments that fluctuate wildly month-to-month.

Still, others simply want to change locales and enjoy new scenery while still living in their own home. Without the risks of having a rental property with increased mortgage payments and holding costs. Without the uncertainty of finding tenants who can pay the rent in these post-COVID times.

What Are the Risks Of Home Equity Loans?

You might have been considering the idea of using a home equity loan to help you buy another house. But is that wise given what happens when real estate values go down?

There are some key factors to consider before making this decision.

House Values Dropping

The biggest risk with home equity loans is that real estate values might go down. This means you will owe more on your loan than the house is worth, and this could lead to a foreclosure if you can't make those monthly payments anymore.

It's important to remember too that these are usually long-term loans, so even if prices do start going up again it may be years before you're able to recover value or sell at a profit.

Increased Debt

The main risk of taking a home equity loan is that you increase debt on your original property, as well as debt on the new property. But not building up any savings.

This puts you at risk of foreclosure, losing your home, and damaging your credit rating.

Income Dropping

The economy is still suffering from the consequences of COVID and incomes are at risk. You may wonder if it is foolhardy to buy a new property when you are already strapped for cash.

Understandably, many people want to get back into the market. But if your income drops again or prices start to fall, this could be risky for your family and long-term financial stability.

If you need more money in the short term it may be better to not risk additional debt on another home purchase until things stabilize financially.

What Are My Best Options?

You need to look at what you are wanting to achieve. And consider in your own situation whether it is better to borrow more money, or buy and sell.

Do You Want to Move to a New Location?

There are two ways of looking at it:

If you have equity in your home and are considering buying another house, it may be worthwhile to sell and buy the new home. This will allow you to make a larger purchase without having two mortgages at once. Most people find selling their house to be a much smoother process than going through the loan application and approval processes.

One thing to consider is you might want to keep your house for another use, such as renting it out or using it as collateral on future loans.

It's important not just to look at whether keeping your home will save money in this one instance but also how that decision may affect other things down the line.

This means having a plan before borrowing from equity. Make sure you're aware of all the pros and cons so you can make an informed decision about what is best for you!

Are You Ready to Retire or Downsize Your Home?

For most people, it makes more sense to sell your house and buy a new one.

This can have the benefit of eliminating all house loans, having a new home, and cash in the bank. This is simpler and stress-free compared to taking additional debt and relying on tenants to look after your property and paying rent on time.

Do You Want to Add a Rental Property to Your Portfolio?

If you're considering adding a rental property to your portfolio, then it can make more sense and be advantageous for you to use the equity in your home. It also has some advantages in taking on new debt from another lender.

The advantage of this is that instead of paying the rent with money coming out of pocket each month, someone else pays the mortgage - so there's an income stream already set up without any work needed on your part!

But remember, buying an investment property is a business and in any business, there is an element of risk which you need to be comfortable with.

You've considered the options and you still can't decide what to do? That's ok! The key is just to make a decision.

What Will You Choose?

Which option sounds best for your situation?

If you think now that home prices will continue going up, then getting another house may be a good idea in case of future price increases. Can I use a home equity loan to buy another house?

If you plan on staying where you are, it might not be worth it for an equity loan because rates could change or property values decrease over time.

For most people selling their house, buying a new home is the best option. But rather than waiting to find buyers, you can access our website to get a cash offer on your home now.

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