Can You Buy a House with a Home Equity Loan?
Buying a House with a Home Equity Loan
A home equity loan can be a source of funding for your next home. Although you are unlikely to be able to buy a home outright with a home equity loan, you may be able to put a substantial down payment on a second home.
Using a home equity loan to purchase can have some benefits like:
- A home equity loan is likely to have a lower rate than a second separate mortgage because lenders know that you are committed to your first home.
- The interest on the home equity loan is tax deductible
- If you spend less than 10% of the year at the second home, you could list it as an investment and be able to deduct expenses like maintenance costs and depreciation. If you spend more than 10% of the year at the second home, you can still make proportional deductions.
- If the second home was being leased or rented out by the previous owner you can use the income history when negotiating with your lender, this will add to the viability of the loan.
- A home equity loan could have lower closing costs than if you were to originate a new and separate mortgage. You could also avoid costs associated with mortgages like title searches and insurance.
The challenges that you could face are that:
- You will need to have substantial equity in your home.
- Ultimately, you will be putting more debt on your primary home, which puts you at risk of losing it.
- If you choose not to live in the second home or rent it out you will have to consider a whole new set of different insurance, tax and rental-income reporting. A miscalculation can have dire financial consequences .
- An additional home inevitably means more expenses like home insurance, property tax, and maintenance costs.