Can I Use a Home Equity Loan to Buy Another House?

Using a home equity loan to buy another house is technically possible if your mortgage company allows it, but that doesn’t mean it’s necessarily advisable. Not only are you incurring more debt, you’re also borrowing against your original home, which means you could risk losing both houses if you’re unable to keep up with payments on the second one. That said, there are situations where using a home equity loan to buy another house could make sense.

Key Takeaways

• Home equity loans can provide you with a large lump sum that can potentially be used for a down payment on another home or to buy a property in cash.
• While home equity loans can unlock some of the value of your home, you still have to repay that loan, with interest and fees, so it’s not free money.
• Using a home equity loan to buy another house can put you at risk of losing both homes if you can’t keep up with payments.

Buying Another House With a Home Equity Loan

If you have a mortgage, you also typically have equity, which is the value of your home minus any debts on it. For example, if you have a $500,000 mortgage on a home valued at $1 million, you would then have $500,000 worth of equity. This amount can often be used as collateral for a home equity loan.

Not to be confused with a home equity line of credit (HELOC), which works more like a credit card, a home equity loan is a lump-sum loan that uses your home equity as collateral. If you can’t pay back the loan for whatever reason, the lender could take possession of your home.

Taking out a home equity loan may appeal to homeowners who want to unlock some of the value of their home without selling it. Typically, you can borrow a significant amount, as your mortgage and home equity loan can add up to around 80% of your home’s total value, depending on lender limits.

So you might consider using the funds from a home equity loan to make a big purchase, such as buying another house for an investment or vacation property. In some cases, you can even use that money to take out a new mortgage on another house, rather than having to buy it in cash, which can give you significant leverage. Using the example above, if you took out a home equity loan based on your $500,000 in equity, you could borrow $300,000 and use that as a 20% down payment on a $1.5 million home.

In some cases, such as when you can comfortably afford the mortgage payments on the new home and just need access to cash for the down payment, this maneuver can be effective. In others, however, using your equity as collateral may increase your exposure to risk and cost more than what’s prudent.

Pros and Cons of Using a Home Equity Loan to Buy Another House

Pros

• Provides access to large lump sum

• Lower borrowing costs than some financing methods

• Gives homeowners the ability to use equity without selling

Cons

• Creates foreclosure risk

• Interest rates are usually higher than for traditional mortgages

• Increases your total debt and monthly payments

Pros Explained

• Provides access to large lump sum: Coming up with the money for a down payment on a second home can take years, but a home equity loan can quickly unlock a large lump sum.
• Lower borrowing costs than some financing methods: While home equity loans usually have higher interest rates than traditional mortgages, these loans do tend to have lower rates than several other financing methods, such as personal loans or credit card advances.
• Gives homeowners the ability to use equity without selling: If your home has gone up in value significantly or you’ve paid down most of your mortgage, you could have a lot of equity. If you don’t want to sell your home yet, you can instead access that money with a home equity loan, though you’ll have to repay what you borrow.

Cons Explained

• Creates foreclosure risk: While it can feel great to unlock the equity in your first home, borrowing against it adds risk. If you can’t keep up with payments on a home equity loan, you could face foreclosure on both your houses.
• Interest rates are usually higher than for traditional mortgages: If you have sufficient savings for a down payment and can get approved for a traditional mortgage, then this may be the more affordable option in the long run, as home equity loans usually have the higher interest rates of the two.
• Increases your total debt and monthly payments: Taking out a home equity loan might unlock some of the equity in your home, but it’s not free money. You have to pay it back, with interest and fees, so it increases your debt and adds to your monthly expenses.

Important

Taking out a home equity loan means taking on new monthly payments. This could make budgeting stressful, especially if you’re still paying off your first mortgage.

Home Buying Alternatives

While it’s possible to use a home equity loan to buy another house, it’s not your only option. Some alternatives include:

Cash

Saving up to pay for a second home in cash—or at least to afford the down payment—allows you to keep the equity in your first home and avoid taking on as much debt.

Retirement Plan Savings

You might be able to use your retirement plan savings to buy a home outright or cover the down payment. However, you need to carefully consider whether this is a good option for you. It might make sense if you’re retired and have plenty of savings, but it might not be a wise move if you’re taking the money out pre-retirement and possibly paying penalties for early withdrawals.

Personal Loan

An unsecured personal loan usually has higher interest rates than a home equity loan, but one advantage is that you don’t have to put your home up as collateral, so there’s not as much at risk.

Cash-Out Refinance

A cash-out refinance replaces your first mortgage with a larger one, with the difference between the two amounts given to you as cash. However, you still have to repay this excess amount, plus interest and fees, and it changes the terms of your original mortgage. So this option might only make sense if you already have a good reason to refinance, such as if you have an opportunity to lower your original mortgage rate.

Home Equity Line of Credit (HELOC)

A HELOC is similar to a home equity loan in that you’re borrowing against the equity in your house, but a HELOC is a revolving credit line. So, with a HELOC, you don’t have to take out the full amount all at once; you might borrow money out for a down payment, for example, and then later take out more for maintenance.

Reverse Mortgage

For those ages 62 or older, one possibility could be taking out a reverse mortgage, which involves getting a lump sum loan that accrues interest but doesn’t require repayment until you leave the home. So this could be an option for seniors looking to buy a vacation home, for example, but be aware that this type of lending product eats into the equity of your first home and could be more expensive than it seems at first glance.

The Bottom Line

Just because getting a home equity loan can provide you with enough cash to buy another house doesn’t mean it’s necessarily the right decision for you. You need to be certain that you can handle the additional debt, rather than treating it like free money. That said, if you can comfortably afford repayments, it could be a good option for unlocking the equity in your home.