Buying a second home – whether it’s a vacation home or purchasing one for investment purposes – is going to be a little bit different than when you purchased your primary residence. There are a few ways you can go about financing this purchase, if you need to. One of the ways you can do this is by using the equity you have built up in your first home and leverage it to buy your second. Here’s what you need to know. 

What is equity?

As you pay down the mortgage on your home, it means you actually own more and more of the property. The equity in the home refers to the portion of your home that you own. 

For example, if your home is valued at $400,000 and you have a mortgage on it for $200,000 then you would have $200,000 in equity. Now there are rules and laws about how much equity you can pull out of your home for financing purposes. 

Can you use the equity to purchase a second home?

Yes, you absolutely can. However, the amount of equity you have in your home will impact how much money you can borrow to finance the second property. 

Using equity to qualify to buy a second property 

Home equity loans are backed by real property that the lender can foreclose on if you don’t make your agreed upon payments. For that reason, these types of loans have some of the best rates available on the market right now. 

Further, home equity loans are not necessarily subject to the same qualifying process that other types of borrowing are. 

When it comes to a home equity loan, you are securing the loan against your property, so the lender has something to take if you default. 

What types of property can you buy with a home equity loan?

Typically, people who are purchasing a second property are buying one of two types of property: a vacation home or a rental/investment property. 

Both options have value to the buyer. With a vacation home you have a place for your family to enjoy during the summer and a place to get away to. You can also rent it out when your family isn’t using it and get some extra income.

With a rental property, the income will help to pay for the mortgage and eventually will become all positive cashflow for you. 

The lender will want to know about the property you are purchasing, and what you are planning to use it for. 

Lower fees and closing costs with a home equity loan

When you purchase a first home with a traditional mortgage, there are a lot of originating costs to the lender for processing, making sure the borrower can make the payments and so on. This is because there is nothing to secure it again. 

When purchasing a second property with a home equity loan, there is much less involved in terms of originating costs which means the lender doesn’t have to charge these fees. Additionally, you may see lower interest rates on a home equity loan because the first home is used as collateral for the loan. 

Contact us today

If you are considering purchasing a second home, we can help you find the right home equity option to finance it with. Contact us today for more information.

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