Friday, August 19, 2022
UncategorizedHow to Use Home Equity to Buy Another House

How to Use Home Equity to Buy Another House

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After experiencing the pride, responsibilities, and joy of buying and owning their first home, some homeowners may have the ambition to purchase a second one. Whether the new house serves as a second residence, a home to rent to others, or a summer or winter vacation home, it’s a significant investment that homeowners should ensure they can afford.

People may decide to finance a second house with cash or with a mortgage. Homeowners can use online resources to help them explore which financial option best suits them. Researching the available mortgage rates offered by local lenders and using a mortgage calculator to estimate what the overall costs of payments each month would be can guide homeowners in making a decision. Homeowners should then look over their finances and determine if it’s in their best interest to pay with cash or if taking out a mortgage is the way to go.

To pay for a second house by refinancing a home mortgage means to change from one home loan to a different one. Moving to a new loan that has lower interest rates can save homeowners some money in the process, as refinancing a mortgage can remove private mortgage insurance premiums (PMIs). Factors such as the term length and size of the home loan can affect how much money homeowners save after switching to a new loan.

A helpful tip for homeowners considering refinancing their mortgages is to know the features of their current loans beforehand. For instance, it’s crucial to know if the interest rate on one’s existing home loan is variable or fixed.

People who are sure they want to refinance their mortgage should consider if they will make an internal refinance, switching to a new loan with their current lender. Going this route can relieve homeowners of the responsibility of paying exit fees to end their loans and application fees to start new ones.

Photo by Tierra Mallorca on Unsplash

A similar financing option that homeowners can choose is using equity to buy another home.

Many homeowners may have heard of equity, the value of their interest in their home, but they may not have ever considered using it to buy a new property.

Equity is the difference between how much a home is worth and what a homeowner owes on their mortgage. For this reason, home equity can increase as the value of a home increases or as homeowners make payments on their mortgage.

For homeowners wondering if they can use home equity to buy another property, the answer to their question is yes.

The equity on one’s home can become a deposit on a second house they wish to buy, while their first property serves as a security on their new debt.

Lenders calculate a loan-to-value ratio (LVR), the mortgage amount compared to the property value, to determine if they will extend credit to borrowing homeowners and how much a borrower needs to put in a down-payment. In general, lenders tend to offer borrowers the lowest possible interest rate for LVRs less than or equal to 80 percent.

Homeowners can then put their usable equity toward the home mortgage for a second property. Home equity loans disbursed as a lump sum require homeowners to pay interest on the full loan. A home equity line of credit, however, only requires payments on the amount borrowers use.

Consulting a financial professional as well as a market expert for guidance can help homeowners ensure they make a well-informed decision that benefits them. A financial advisor can inform homeowners of the risks associated with buying a second home. For instance, homeowners can face repossession of both properties if they can’t pay off the debt on one of them. Additionally, a dip in the property market can result in a drop in the value of your home. If the market prospers, however, the investment could work in homeowners’ favor.

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