Before you apply for a home equity loan to buy another house, it’s worth considering the alternatives. They, too, have advantages and disadvantages.
The best source of cash to buy another house would be money that you have already saved and for which you have no other immediate need.
Retirement savings
Your retirement savings are a possibility. If you have a 401(k) plan at work, for example, your employer may allow you to borrow a portion of it through a 401(k) loan. Like home equity loans, retirement plan loans can be risky. You’ll typically need to pay back the loan within five years-even sooner if you lose your job. If you can’t pay it back, then you’ll owe income taxes and possible penalties.
If you borrow from your 401(k), you will have that much less money saved for your retirement years, which could mean financial problems down the road.
Personal loan
You could consider a personal loan. You’ll pay a higher interest rate than with a home equity loan or HELOC, but if the personal loan is unsecured, then your home won’t be at risk if you fall behind on payments.
Cash-out refinance
A cash-out refinance pays off your current mortgage with a larger one based on the accumulated equity in your home. You can then use the extra cash for other purposes. Of course, you’ll now have more debt and higher monthly mortgage payments. These loans also have closing costs that can run into the thousands of dollars.
Home equity line of credit (HELOC)
Using a HELOC to buy an investment property, rental property, or second home can give you more flexibility than you get with a home equity loan, in that you don’t have Piedmont loans to take the money all at once. This might be useful if you need some cash now for a down payment and expect to need more in a year or two to make some renovations. However, HELOCs typically carry variable interest rates, making them less predictable than a home equity loan, which usually has a fixed rate.
Reverse mortgage
There probably aren’t too many people who are 62 or older and looking to become landlords in their retirement, but theoretically, if you meet that age requirement, you could take out a federally insured home equity conversion mortgage (HECM), better known as a reverse mortgage, to buy a rental property to provide you with an income stream in your twilight years.
A HECM converts the equity in your home into cash that is usually tax-free and doesn’t affect your Social Security and Medicare. The lender pays you the money, and you don’t have any monthly payments on the mortgage. Indeed, as long as you live in the home, you don’t have to pay the mortgage off at all, though you still must pay the costs of maintaining your home. However, when you move out of the home, sell the home, or die, you, your spouse, or your estate must pay the mortgage off in full, plus interest from a variable rate that accrues over the life of the loan and eats up the home’s equity.
This means that if you plan on leaving your home to your heirs, there would be a hefty bill for being able to do so. Still, at that point, the proceeds from the sale of your rental property could possibly pay off the reverse mortgage.
Yes, if you have enough equity in your current home, you can use the money from a home equity loan to make a down payment on another home-or even buy another home outright without a mortgage. Note that not all lenders allow this, so if you’re planning to buy the second home with a mortgage, you may need to shop around to find one that does.
