Using Your Home Equity To Buy Another House

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1. What Is Home Equity?
2. The Advantages of Using Your Home Equity To Buy Another House
3. The Disadvantages Of Using Your Home Equity To Buy Another House
4. How To Use Your Home Equity To Buy Another House
5. Conclusion

When it comes to real estate markets, it is vital to have easy access to funding while buying another home. If you are wondering whether you can use your equity to purchase another house, then you’ll find the answer here. Home equity loans can be very low, and can also be a convenient way to facilitate your home purchase.

If you’re considering using your home equity to buy another house, there’s one vital question to ask yourself —Is this intended property meant to be a second home or an investment?

It is important to have a defined goal in mind before purchasing.

What Is Home Equity?

Home equity is the type of mortgage that allows individuals to have access to the equity that has already been built in their home.

To simplify it, it is the difference between the worth of your home and what you owe your lender. The more you make mortgage repayments and minimize the balance of your home loan, the more you build better equity.

When you have good home equity, there’s a possibility to receive additional money with a lump sum payment which will then be repaid to the lender in fixed installments over time.

The Advantages of Using Your Home Equity To Buy Another House

Using your home equity to buy another house can become an advantage for you since home equity is secured. Good home equity will offer you lower interest rates and also have higher borrowing limits than a lot of unsecured personal loans.

1. Having Good Home Equity Helps Capitalize Your Assets With Reduced Risk
   • When you use good home equity to purchase another house, you can pull funds from a stable source and minimize the risk of affecting your long-term finances.
2.  It Allows You to Deposit a Large Down Payment
   • When you have good home equity, it can offer you a large lump sum of money for a down payment while processing a second home. With this large sum of down payment, you can pay off in lower interest rates, minimized insurance premiums, and lower monthly installments.
3.  You Can Predict the Fixed Rates
   • As you know, good home equity comes with low-interest rates which are less than getting personal loans to buy another house since they are more secure. Many Canadian lenders see good home equity as a high-quality way of collateral. Another good thing about using your home equity to buy another house is that the interest rates are fixed, which allows you to build a budget that makes consistent monthly payments for a long period.

The Disadvantages Of Using Your Home Equity To Buy Another House

Even though there are advantages to using your home equity to buy another house, there are also some potential risks.

1. You’ll be Trading Assets for Debt
   • When using your home equity to buy another house, it means that you’re turning your assets into debt. This is because you are putting up your home as collateral to secure another home loan. However, it may still be worth it in some cases you will not need to withdraw money from your savings. But there are risks of having higher debt that you need to consider.
2.  You Become Vulnerable to Shifts in the Housing Market
   • Every homeowner is technically vulnerable to these shifts, but when you have two properties, you end up doubling the risk. This means that when either of the homes loses value, you may end up owing more on your mortgage. This can affect you drastically.
   • Once you default on the payment, you might end up losing both your first and second house, since both are used as collateral.
3.  You’ll Have Three Mortgages for Only Two Houses
   • When you use your home equity to buy another house, it’s like having a second mortgage. When you combine this with the financing that you’ll need for your second house, you might end up with three mortgages for only two houses.
   • Though this is not entirely bad, since it’s no worse than having two separate mortgages and another loan that will make you pay higher interest rates.
4.  Using Your Home Equity to Buy Another House May Likely Not be Tax-Deductible
   • A few years ago, changes to tax codes led to serious guidelines for investing in properties. So it’s advisable that you consult your accountant before making any decisions on this. But in case this isn’t stated already in the documentation of the house you want to purchase, then it’s likely it will not be tax-deductible.

How To Use Your Home Equity To Buy Another House

If you have an interest in using your home equity to buy another house, then the value of your home will need to be higher to support buying another house. Not only that, but you’ll also have to meet up with other requirements of your lender.

Below is how you can use your home equity to buy another house.

First, Decide What You Want

Note that before you take any equity out of your home to buy another house, make sure you decide what you want and need. A bad home equity limits how much you get. Sometimes your lender can give you access to up to 85% of your home equity.

Ensure You Have Good Home Equity

Having good home equity makes you eligible to access a good sum of money since you will be using your home equity as security. This is because it has a fixed interest rate and also a fixed monthly installment payment over a while.

You can use a loan amount calculator to see the maximum amount you will be eligible to get when buying another house using your home equity.

Cash-out Refinance

If you didn’t know, a cash-out refinance is the type that pays off your current mortgage with a big one based on the accumulated equity in your home. This means that you can then use the extra cash in buying another house. However, you’ll now have more debt and larger monthly mortgage payments. But note that these types of refinancing also have closing costs which can run into thousands of dollars.

Reverse Mortgage

If you’re a homeowner that is 62 years or older, you will have an additional option of using your home equity to buy another house via Home Equity Conversion Mortgage (HECM). This is also referred to as a reverse mortgage.

HECM gives borrower’s ability to access home equity without any down payments. But the loan will be repaid whenever you leave the home. Reverse mortgages offer a flexible method of using your home equity to buy another house. This means as borrowers, you can choose between getting a lump sum or a line of credit.

But be aware that while you will not make a down payment with a reverse mortgage, the interest will accrue. It may make the loan balance increase and can end up consuming your home’s equity.

Conclusion

Having a good home equity can make buying another house easier for you. Just like regular mortgages, your home equity will be secured by your home, though it may be at risk if you can’t repay. If you’ll rather not put your asset at risk like that, there are other alternative ways you can use to borrow funds in Canada that may a more suitable option for you.