May 18, 2024
Equity

Can you use your home equity to buy a second home?

The average homeowner in the U.S. can tap into nearly $200,000 worth of home equity. That’s money that can be used to pay off debt with high interest rates, make home repairs and more. In fact, with $200,000 at your fingertips, you may decide to use it to buy a second home.

But is that really a feasible option? Does it make sense to use the equity in your current home to buy a second home and if so, how can you do it? Below, we’ll break down why your home equity may be a viable option for purchasing a new home.

Can you use your home equity to buy a second home?

“Home equity is a perfect way to purchase a second home,” explains Shannon Eney, Vice President of Mortgage Lending with Mutual of Omaha Mortgage. Here’s what you need to know if you plan on using your equity to purchase a second residence:

How can you use your home equity to purchase a second home?

“One great option is to take out a home equity loan, which is a fixed-rate second mortgage that provides funding based on how much equity the owner has in their home,” explains Eileen Tu, vice president of product development at Rocket Mortgage. “With a home equity loan, homeowners can access lower-cost funding as compared to personal unsecured loans without refinancing their first mortgage.”

That’s important, especially considering today’s interest rate environment. After all, if you purchased your home more than 18 months ago, chances are that today’s mortgage rates are higher than the rate you’re currently paying. So, you probably don’t want to refinance your low-rate mortgage at today’s interest rates if you don’t have to.

What are the benefits of using your home equity to purchase a second home?

There are several benefits to using your home equity to purchase a second home. Some of the most important to consider include:

  • Home equity offers versatile cash: A home equity loan makes it possible to “access funding that is as versatile as cash, with no restricted uses, at a lower cost than personal loans,” says Tu. That means you can use your home equity to purchase your second home; and if there’s money left over, you may be able to use it to make any necessary renovations to your new purchase.
  • Interest may be tax deductible: “Additionally, the interest paid on a home equity loan may be tax-deductible,” explains Tu. Specifically, your home equity loan interest could be tax deductible if you use the money from the loan to repair or renovate the home you used as collateral or if you use it to purchase another piece of real estate (like a second home).
  • You could turn your home equity into an income stream: One “benefit of using these funds for a new purchase is turning the equity into another asset or income stream with an investment property,” explains Eney. “A lot of second homes can be used as short-term rentals, i.e. Airbnb/VRBO, creating extra revenue for a homeowner.”

The bottom line

You can use your home equity to purchase a new home and doing so may be a wise idea. Moreover, accessing your home equity can be simple with a home equity loan. If you do choose this option, you could generate a new income stream while potentially reducing your tax burden. Compare your home equity loan options to see how much versatile cash you have available to purchase a second home with today.

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