Using Home Equity to Purchase a New Home | A Guide

If you’re looking to buy a second home but are short of ready cash, you might consider tapping your equity stake in your existing home to help fund your new purchase. Here’s what you need to know about using home equity to purchase a new home.

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

Your home is your most valuable asset, and if you’ve been in it a while, you most likely have built up a significant stake in its equity. Is it possible to tap this equity by using a home equity loan to help pay for the purchase of a second home?

A home equity loan allows you to cash out up to 80% of the value of the home (minus mortgage balance). While it is possible to use that money to fund the purchase of a second home, there are some important considerations to bear in mind if you’re thinking about going this route.

Why Use a Home Equity Loan?

There are several strong reasons why tapping your existing equity to fund the purchase of a second home may make sense.

Cash Is King

Nothing beats cash in a property transaction, and a home equity loan can put a large lump sum in your pocket, allowing you to:

  • Make an all-cash offer in a competitive market
  • Make a larger down payment to improve the terms of your second mortgage
  • Pay down points to get a better rate

Ready Funds

A second home can be an excellent investment in many cases, and your existing home may be your only source of significant funding for such a purchase. A home equity loan essentially allows you to use your original home as collateral, this time to purchase a second property.

Low Borrowing Cost

The cost of borrowing through a home equity loan is also significantly lower than other forms of borrowing (such as personal loans) although still higher than typical interest rates on a home mortgage—if you were able to qualify for one without additional funding.

Tax Advantages

The lump sum payment for your home equity loan is not considered income by the IRS and therefore not taxable. Interest payments on your loan may be tax deductible. At the same time, mortgage payments on both of your homes are also potentially tax deductible (unless you are renting out the property), depending on how much time you spend in the property. Consult with a tax professional to confirm. 

Is Home Equity Your Best Option?

There are also significant reasons why using a home equity loan to purchase another property might not be your best option. Mortgage lenders look closely at your funding sources and may not allow you to use the money borrowed against one house to help fund a mortgage on another—unless your income is high and your credit score is stellar.

On the other hand, there is very little to stop you if you choose to use money from a home equity loan to make an all-cash offer on another property.

Collateral Damage

The real danger of using a home equity loan to piggyback mortgages is that you end up using your first home as collateral for both of your loans. If the housing market changes and your house becomes worth less than what you own on either mortgage, you risk losing not just your second property but your original home as well.

Debt Spiral

Funding a second home loan with a home equity loan is essentially turning an asset (your equity) into debt (your loan balance). That can be risky if you’re unable to sustain payments on both your loans and your first and second mortgages. In cases like this, it might be better to consider a cash-out refinancing or other financing options.

Costs Whammy

You could also face a potential double whammy from closing costs and other loan fees if you close on both a home equity loan and a mortgage in quick succession. Several states also charge a mortgage recording tax on both home loans and home lines of equity.

Step-by-Step Guide

Once you’ve determined that tapping your equity to fund a cash offer or mortgage application is the way to go, then follow these steps. Timing is everything, especially if you’re applying for a home equity loan and a second mortgage simultaneously.

1. Determine How Much Equity You Can Tap

Check your mortgage statements, contact your lender, or use an online home equity calculator to determine how much of the equity in your home you can access through a loan. Most lenders will not extend loans worth more than 85% of the value of your equity.

2. Estimate Your Loan Costs

Calculate the likely cost of taking out a home equity loan. Remember you’ll face many of the same costs if you are applying for a second mortgage simultaneously. Loan costs typically include:

  • Application, origination, and processing fees
  • Inspection or appraisal fees
  • Closing costs
  • Loan insurance
  • Tax liabilities

3. Shop for Lenders

Compare rates, terms, and fees by comparing different lenders including banks, credit unions, and online lenders. Consider talking to community-based lenders like credit unions. They often originate loans locally and will take a more personal interest in your particular financial situation. 

Consider preliminary applications with between three and five lenders to gather detailed rate and terms information.

4. Apply for a Loan

Once you’ve settled on a lender, apply for a loan. You’ll need to provide details about your existing mortgage and further information about your income, spending, assets, and liabilities.

The lender will work to establish the value of your property. This will often include an appraisal or inspection. Home equity loan processing times vary, but most lenders take a few days to approve a loan.

5. Close on Your Home Equity Loan

Complete paperwork, sign final documents, and pay closing costs and other fees. You will receive your home equity loan lump sum in a few days. This money is yours to invest in a second home or use in any other way you see fit.

Open Doors With a Greater Texas Credit Union Home Equity Loan

A home equity loan is a great way to get a lump sum payment to use on the things that are important to you, from home improvements to education expenses to consolidating your debts. At Greater Texas Credit Union, we offer our members home equity loans with:

  • Competitive rates
  • $0 closing costs
  • No prepayment penalties.

Click below to learn more about how our home equity loans can help you unlock more value in your life.

See our home equity loan benefits & low rates