The short answer is yes, but you want to weigh your options.
Before you answer the question, “Can I use a HELOC to buy another house,” we must first explain what a HELOC is and why using this loan option for a second home may have some downsides. A HELOC is a home equity line of credit. Once your property exceeds your original home purchase loan amount, you gain equity. Equity can be leveraged to improve your financial situation, fund home improvements, or just about anything you may need.
Let’s talk about how HELOCs work. In essence, it is a revolving line of credit. You basically borrow against the available equity and use the house as collateral. The cool part about these loans is that they provide upfront capital that you repay over monthly installments. As you pay back the loan, your credit allowance replenishes, and it essentially serves as a credit card would. HELOCs are beneficial since they often come with lower interest rates, and with a good tax accountant, in some situations, the interest on these loans is tax deductible.
So can I use a HELOC to buy another house? Yes. Should I use a HELOC to buy another house? Only if you are 100% sure that you aren’t going to miss monthly payments and run a risk of defaulting on your loan, or worse, risk foreclosure. Essentially, you could risk losing your new home, your primary residence, or both. You will want to check the variable interest rate before you decide on a HELOC since this will affect your monthly payments. Some lenders do have financing options for getting you a fixed interest rate, so be sure to ask your mortgage lender if you qualify. It is significantly important to avoid thinking in the short term when deciding to use a HELOC. Unless you are able to pay for the second house in full, you will have three loans on two properties, your first mortgage, your HELOC, and the new loan for your next property. So consider all three monthly mortgage payments before you dive in. HELOCs typically come with a fixed structure of a 10-year draw period followed by a 20-year repayment period. These loan terms give you ample time to borrow and repay the loan.
What do lenders typically recommend HELOCs for?
Traditionally lenders recommend HELOCs for home improvements on your current home. When the market value of your home exceeds the debt you owe, HELOCs offer the homeowner the option to use those funds to improve the property and gain exponential property equity. Additionally, home equity loans provide an excellent opportunity to leverage high-interest debts, like paying off the loan balance on credit cards or education loans.
What’s the difference between a HELOC and a Home equity loan?
In some cases, a home equity loan may be a better choice. With this type of loan, you get all of the money in a lump sum upfront if you have a substantial amount of equity in your home; congratulations! You can use that equity for anything you want, even an investment property. Lenders typically allow a homeowner to pull out up to 85% of the primary home value (minus the amount that you owe). If you choose to roll these funds into a new property, you must ensure you can afford the new mortgage on the second property. Otherwise, you run the risk of losing both homes.
Can I use a HELOC to buy another house? Sure, let’s talk about the pros and cons:
Pros:
- Sizeable down payment
- Asset diversity
- Access to funds quickly
- It’s cheap money. Offering low-interest options for down payments
- Fixed-rate interest
- You can still keep your savings as your emergency fund
- If your second home is a rental property,
Cons:
- Asset risk is doubled
- Foreclosure of two properties
- Variable interest rates are unpredictable
- Some HELOCs are not tax deductible
As with all loans, whether it be a cash-out refinance loan, a personal loan (which will come with higher interest rates), a reverse mortgage, or a HELOC, there will be fees, checks of your credit score, and closing costs associated with securing a loan to buy another house. One of the most important of these is the appraisal fee. Appraisal fees help to determine your loan to value, making this the most important step in the process. Preparing your current property and repairing any damage before your appraisal is critical. The better your appraisal is, the more money you will have for your next home-buying journey. So do your homework and ensure you are in the best standing for getting approval and achieving your next real estate dream.
Can I use a HELOC to buy another house? Let’s connect you with the people that can help you decide which loan option is best.
Your home plays a major role in financial security. So, regarding your mortgage loan, you want to be sure you’re making responsible decisions. Undoubtedly, the loan process invokes insecurity in many people. In particular, navigating through a sea of paperwork and financial jargon can be unsettling without honest guidance. In fact, a lack of clarity can lead you down the wrong path and compromise your financial future.
You deserve to work with a lender who brings clarity and has your best interest at heart. Whether you are looking to purchase a home, help with refinancing, lower interest rates, or specifically ensure that you have made the best decision for the life of your loan, Mortgage Insider can help you after helping thousands of families reach their goals to create stronger financial futures.
The steps are simple:
1. Schedule a Call: An experienced loan officer can discuss your needs and guide you through the possibilities.
2. Get Approved: We’ll help you through the application process and facilitate the steps for approval.
3. Exhale: Put your feet up and feel secure knowing you made the best decisions about your home loan.
With proper guidance, you can get your first home, accommodate your growing family, and start that renovation project—whatever goal is on the horizon. An alliance with Mortgage Insider will give you the confidence to know that your mortgage loan is setting you up for financial success. Mortgage Insiders offers today’s latest financial news and mortgage trends. Check out their channel for current events.
