Home equity Archives

A sweet little seaside cottage just went on the market and you’re now daydreaming of a weekend home. You found a fixer-upper with great potential—you could buy it and flip it. Or you’d like a new income stream as a rental property owner, and a perfect bungalow down the street was recently listed.

In any of these scenarios, since you’re not planning to leave your current home, the proceeds from its sale aren’t an option for a down payment—but that may not necessarily be a deterrent. In many cases, taking on a second property can still align with both your personal and financial goals.

To make purchasing your second home a reality, it all depends on how you finance it. And in these types of cases, many homeowners consider using their current home’s equity to buy a second property. The market is certainly favorable: In 2017, according to CNBC, homeowners with a mortgage (representing approximately 63% of all properties) saw their home equity go up by 12% at an average of $15,000 per homeowner and more than $900 billion collectively. That extra value could be tapped to go toward another down payment.

Should you use your home equity to buy a second home? Here are a few things to consider.

How Much of Your Home Equity Would You Need to Tap?

Regardless of whether you own your home outright or currently have a mortgage, you’ll want to figure out the exact amount you’ll need to take on a second property. Many homeowners will seek to borrow only enough funds to cover the down payment for the second home. But if you’re considering a fixer-upper, it may make sense to take out an amount sufficient to cover not only the down payment but also anticipated repairs and renovations.

What’s Your Risk Tolerance?

Knowing how much risk you’re comfortable taking on is key when using your current home equity to buy a second home. If your second home will be an income property (either short- or long-term rentals), do you have enough cash on hand to cover expenses during lean times of year or periods when the property is vacant? If something breaks or unforeseen damage occurs to either your primary residence or second property, do you have enough money to cover these unexpected repairs? Finally, if a financial hardship were to strike (e.g., a medical emergency or job loss), could you potentially be on the hook for foreclosure on either or both of your properties?

What Will Your Debt-to-Income Ratio Be?

Again, knowledge is power. Consult a mortgage calculator and compare your home equity lending options to know exactly what your monthly payments will be once you’ve taken on a second home. Read all fine print thoroughly and consult with your potential lenders to ensure you’re getting the most advantageous financing plan for your goals (and no hidden surprises, like fees, down the line). In addition to your monthly payments, factor in any tax implications (both obligations and benefits) that may result from purchasing a second home. If you’re not sure how your taxes will be impacted, speak to your accountant or other trusted tax professional.

Ultimately, your current finances and the specifics of your potential second property will play an equal part in determining whether becoming a homeowner twice over is feasible (and worth your while). By making clear-eyed calculations and having honest conversations with your potential lending partners, you can decide whether it makes good financial sense to take on another property.

Ways to Use Your Equity to Fund a Second Property

Home Equity Loan

A home equity loan gives you a lump sum of cash that you can use for a down payment on another property, and the fixed interest rate means you’ll pay the same amount every month.

Cash-out Refinance

With a cash-out refinance, you take out another mortgage on top of your current one, and can often lock in a lower interest rate by doing so. However, since it is a brand new mortgage, a refinance comes with fees and closing costs — and may extend your payoff timeline.

Home Equity Line of Credit (HELOC)

A home equity line of credit lets you pull funds as needed, so it can be more flexible than other options. But with that flexibility comes unpredictability as well, since the variable interest rate can change every month.
Home Equity Investment

Finally, a home equity investment allows you to tap into your equity in the form of a lump sum of cash in exchange for a percentage of your home’s future value.

Frequently Asked Questions About Using Your Equity to Buy a Second Home

Is it smart to use a HELOC for investment property?

While the best financing option depends on your own situation and goals, a home equity line of credit can provide flexibility in terms of both the amount of funding you can access and the frequency with which you can access it. However, it might not be an ideal fit if you’re looking for predictable monthly payments, as the interest rates are variable.

How do you use your equity on a paid off home to buy a rental property?

There are more than a few different ways to tap into your equity to purchase a rental property, including a home equity loan, home equity line of credit, cash-out refinance, or home equity investment. All of the options have pros and cons, so it’s a good idea to weigh your options.

Can I use the equity in my house as collateral for a loan?

Yes — with a home equity loan you’re technically using your home as collateral, as the financing is being secured with its value.

Can you use money from a home equity loan for anything?

Typically, yes. You receive a percentage of your home equity in the form of a lump sum, so it can be helpful if you’re hoping to use the money for a down payment on a second property.

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YOU SHOULD KNOW…

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

So many Americans struggle with debt. A survey conducted by Hometap in 2019 of nearly 700 U.S. homeowners showed that while many homeowners are house-rich, they’re also cash-poor, with little day-to-day liquidity. Survey takers indicated if they did have debt-free access to their home’s equity, such as a home equity advance, they’d use it to pay off credit card debt, medical bills, or even help friends and family pay off debt.

Many homeowners responded that they haven’t even considered available options to tap into their home equity. In short, they feel stuck because available financial options only seem to add more debt and interest to the homeowner’s monthly balance sheets. There’s also the issue of qualification and approval, as it’s hard to meet the requirements of many financing options, like a home equity loan, with bad credit.

The good news? This “house rich, cash poor” status quo doesn’t have to continue. Here, you’ll learn about the importance of credit, and how you can still access your home equity if yours is less than perfect.

What Is Credit and Why Does It Matter to Lenders?

Credit refers to the ability to to borrow money, obtain products, or use services while agreeing to provide payment at a later time. The term “credit score” refers to a three-digit number that indicates the level of trustworthiness you’ve demonstrated in the past through experience with creditors, lenders — basically, any company who has given you money. This information is gathered in a credit report through a variety of different sources, including the amount of credit cards you have, along with any outstanding balances on them, your history of loans and repayment behavior, timeliness of monthly bill payment, and significant problems like bankruptcies and foreclosures.

Simply put, lenders want to be as sure as possible that you’ll pay back any money they give to you, and checking your credit is an easy and relatively comprehensive method to gather this information.

If you’re carrying a lot of debt and are worried about your credit, you may think that your home equity is inaccessible. But with a new, non-debt financing option available to a variety of homeowners, you may be surprised at what you can access. Here are a few ways you can tap into your home equity to start using that liquidity to reach your financial goals. ‍

See the chart below for a quick overview of the options that might be available to you based on your credit score, then read on for more in-depth descriptions of each.

Cash-Out Refinance

A cash-out refinance is when you, the homeowner, take out a new, larger mortgage, pay off your current mortgage, and use the excess to fund your needs. This can be done through your existing lender or a new lender and is not considered a second mortgage. According to Bankrate, you typically need at least 20% equity in your property to qualify, and you’ll pay interest on the life of the loan (usually 15 or 30 years). Because of the long duration of a cash-out refi (as they’re commonly known), you’ll want to ensure the interest rate and your expected repayment plan fit into your monthly budget. Homeowners are typically required to have a credit score minimum of 620 to be approved for a cash-out refinance.

Home Equity Loan or Home Equity Line of Credit

Would you qualify for a home equity loan or a home equity line of credit (HELOC) with bad credit? First, you need to know the difference between these two home equity options.

A home equity loan allows you to borrow money using the equity in your home as collateral. A HELOC, on the other hand, works more like a credit card, in the sense that you can draw funds on an as-needed basis. With both home equity loans and HELOCs, your credit score and home equity value will play a part in how much you’ll be able to borrow and your interest rate.

The minimum credit score needed for a home equity loan and a HELOC are usually at least 620, though it depends on the lender. But even if you don’t meet this minimum credit score for a home equity loan or HELOC, you shouldn’t be discouraged. Julia Ingall with Investopedia says homeowners with bad credit should comparison shop for lenders open to working with borrowers like them. Additionally, Ingall notes that working with a mortgage broker can help you “evaluate your choices and guide you to reputable lenders.”

Home Equity Advance

A home equity advance offers homeowners the ability to tap into the future value of their home in order to access their equity now. A home equity investment is a smart way to do just that.

At Hometap, homeowners can receive home equity investments so that they can use some of the equity they’ve accumulated in their home to accomplish other financial goals . The homeowner gets cash without having to sell or take out a loan; and there is no interest and no monthly payment. . Another positive aspect of a Hometap Investment is that hundreds of factors are taken into consideration to approve an applicant — credit score isn’t the defining criterion.

Sell Your Home

For many, it’s a last resort, but homeowners with poor credit can access their home’s equity by selling it outright. Of course, this decision is predicated upon finding a more affordable house for your next home, including favorable mortgage terms for your new place, and ensuring you don’t spend too much on real estate fees or moving costs. You also may be able to improve your credit score before you reach this point. Monitoring your credit score to keep an eye out for potential disputes and discrepancies, maintaining a balance well below your credit limit, and keeping old accounts open are all good places to start.

If you’re feeling house-rich and cash-poor like so many Americans, you now have a host of options to access your home equity. As with any major financing decision, consult with a trusted financial professional to determine your best course of action, and get moving toward your goals.