Purchasing a second or a vacation home is a dream for many people. But saving enough for a down payment may be a considerable barrier. A home equity loan could be the solution.
If you own a home and you’ve built equity in it, it may make sense to use that equity as the down payment to purchase a new or investment home. This could be done in the form of either a home-equity line of credit (HELOC) or home equity loan.
Your home’s appraised value, your equity in it, and your financial profile will all be used by your lending institution to determine whether you’re eligible for additional financing.
Can you have more than one home equity loan?
You can have as many mortgages and equity lines or loans as you can qualify for. As long as you aren’t overburdened or own more than your property is worth, there are no limits on the number of loans you can have at one time.
Your lender may be less willing to extend further lines of credit to you if you already have one outstanding with them. Rather than taking out two of the same type of loans (two HELOCs or two home equity loans), you may have better luck getting one of each instead. This is because each is looked at as a different type of credit – a HELOC with a revolving credit and a home equity loan with a fixed rate.
Finance for a down payment?
Usually, you can borrow up to 80% of the current value of your home less what you owe for your mortgage. As example, if you have a $500,000 home and owe $300,000 on the mortgage, you’d have $100,000 available for a down payment (80% of $500,000 is $400,000. $400,000 – the $300,000 mortgage = $100,000).
If you’re able to take out a loan for more than 80% of your home equity, you will likely have to pay PMI on your original home loan until you have 22% equity in it again.
Benefits to financing a second home with equity
Home equity credit offers some of the lowest consumer rates on the market because they’re secured by high-quality collateral – your home. The terms your lender can offer you are often far better than anything you could secure on a similar personal loan.
Talk to your local Mann Mortgage branch to see whether using the equity in your home is an option for you when considering a new or investment home.
