If you’re considering a second mortgage to help with a major purchase and your financial situation makes it possible, go ahead and apply for one. You can use the money in many different ways, including paying off credit card debt or saving up cash to put toward a new home down payment.
In this guide, we find out: Can You Get A Second Mortgage To Buy Another House, how to buy another house while owning a house, can i use my house as collateral to buy another house, and using home equity to purchase new home.
Can You Get A Second Mortgage To Buy Another House
If you’ve already got your first mortgage, but need a second to make a major purchase, it might be worth considering. However, there are many factors that go into deciding whether or not this is the right move for you. The benefits of getting one can include:
What Is A Second Mortgage
A second mortgage is a loan that you take out to pay for something else. It’s usually smaller than the first mortgage. You can use the money from the second mortgage to buy a new house, pay for college, or pay off high-interest credit cards.
Second Mortgage Loan Types
Second mortgages are available for both purchase and refinance. They can also be used to buy a new car or boat. A second mortgage is usually for a smaller amount than the first mortgage, and the interest rate is typically higher than what you’d pay on an unsecured loan.
Second mortgages are often used to pay off credit card debt or other high-interest loans. If you’re looking to consolidate your debts into one monthly payment, that’s another reason why you might want to consider a second mortgage loan type (or “second liens”).
How Can You Use The Money
If you use a second mortgage to buy another house, you can use the money for any purpose. In fact, it’s best to think of this type of loan as a second mortgage because it works like one. You may have heard that using one to pay off your current home is also known as “paying off your mortgage” or “getting rid of your debt” and that’s true—but only if you take out another loan on top of it first (which makes sense!). That’s because while having both loans will lower your overall debt balance over time (and make paying back those first two easier), they don’t actually eliminate any interest payments—all they do is postpone them until later in life when their impact on monthly budgets is minimal enough not be noticeable anymore!
How To Get A Second Mortgage
When it comes to buying a house, you’ll likely need some extra cash. There’s the option of getting a first mortgage for your initial down payment and closing costs, but if you want to buy another house as well, what can you do?
What Is A Second Mortgage?
A second mortgage is an additional loan used to buy property—usually in addition to an existing first mortgage on the same property. The second mortgage is usually made by a different lender than the one that issued the original first mortgage.
In general, lenders will offer up to 80% of their appraised value on any given home that falls within their lending guidelines. If they’re willing to lend more than this percentage (say 90% or 95%), make sure that they have enough money in reserve before doing so because they may not be able to recover all losses if there are issues with foreclosure later on down the road due in part due interest rates rising over time or other factors beyond just bad luck happening at random times during life events such as divorce proceedings affecting property values negatively instead of positively like most people would assume them being positive influences only affects one person negatively while everyone else’s lives stay positive until something happens which causes stress leading them into making poor decisions causing other people around them also feeling stress which leads back into someone else making poor decisions again in order not feel alone when trying desperately find solutions only
How To Qualify For A Second Mortgage
You should be able to qualify for a second mortgage. The lender will ask you to submit the following:
- Proof of income and employment history.
- The value of your assets (such as the home you are currently living in).
- Proof that you have enough money in the bank to cover your down payment on the new home (usually at least 20% of the purchase price).
- A letter from your primary lender confirming that they agreed to refinance your current house, or another form of collateral such as stocks or bonds.
First Mortgage vs. Second Mortgage
A first mortgage is a loan from a bank or lending institution, which is secured by the property itself. This means that if you fail to make your monthly payments, your lender can take possession of your home.
Second mortgages are loans from homeowners that are secured by their equity in their home and carry higher interest rates than first mortgages because they’re riskier for lenders to offer. Because there are fewer restrictions on second mortgages than on firsts, you will be able to get one even if you don’t meet all of the requirements for getting a regular mortgage (such as down payment requirements).
Getting a second mortgage may make sense if you need money to make a major purchase.
If your goal is simply to get out of debt and make the most of your money, then a second mortgage might not be the right choice. You would need to be able to afford the monthly payments on both mortgages while also paying off any other debts. If you have other loans besides a first mortgage, such as credit cards or student loans, refinancing may not help you reduce all of them at once.
If, however, getting rid of one or more debts is important enough for you to consider getting another loan with its own set of monthly bills and interest rates — for example if it will allow you to buy an item that will increase your net worth — then this option may work well for you.
how to buy another house while owning a house
Renting out your home could be the right choice if you want to buy another home. The choice to rent out your original home could create additional cash flow that your budget has been waiting for. So, if you are wondering how to rent out your house and buy another, you are in the right place.
Let’s explore how to rent out your home. Plus, consider whether or not this option is the right fit for your finances and lifestyle.
Should you rent out your house?
Should you rent out your current home to buy again? Figure out the tax implications, whether you qualify, and even the emotional attachment to your home.
“Becoming a landlord can be intimidating if you’ve never done it,” says Phil Peterson, managing broker at RE/MAX in Schaumburg, Illinois. “There are definitely pros and cons to renting out your house. I’ve been there. But at the time, I wasn’t aware of all those ups and downs.”
Peterson says the situation really depends on the price of your house and what you paid.
How to afford two homes
Before we continue any further, you may be wondering how on earth you can afford two homes. You’ll need to evaluate your finances to determine if your budget can handle another home.
Down payment options for a second home
There are a few options for sourcing the down payment for a second home. First, you can always use savings to purchase a second home. But if you don’t have a down payment in the bank, it doesn’t mean you can’t buy a second home.
Another option is a cash-out refinance or Home Equity Loan or HELOC on your existing home to cover the down payment on your new home. This can be a good option but keep in mind that this will reduce your equity in your current home. Plus, if your current home is still mortgaged, you’ll be responsible for a second monthly mortgage payment.
Loan type options for a second home
If you have the down payment covered, the next step is to find funding.
Conventional loans can be a great option. You’ll need to meet some financial requirements that include having a good credit score and the income to support this new home purchase.
Government-backed loans can be used to purchase a second home but note that most require the financed home to be your primary residence so you’ll need to plan to relocate to the second home (and you’ll likely need to demonstrate a good reason to be moving out of your existing home).
Tips to turn your home into a rental property
Ready to turn your home into a rental property? Here are some tips to help you move forward.
Consider your emotional attachment
Peterson says that another scenario that many people don’t take into consideration when renting their old house is the emotional attachment they have to it.
“This house was your home. Your children grew up there. Your memories are there. So all of a sudden, you have these really nice tenants, and they move out in a few years,” he says.
When you go inside to take a look at it, you realize that these nice tenants didn’t take care of the home the way you did. There are stains on the carpets, and scratches on the wall.
“That emotional attachment to that particular house is very hard to overcome. But if you just buy an investment property that you never lived in yourself, then it just strictly becomes a numbers game — an income-producing building,” Peterson says.
Read the fine print of your mortgage
Many lenders will allow you to rent out the house while you still have an outstanding mortgage balance, but not all of them.
Take the time to read the details of your mortgage agreement. If you have questions, reach out to your mortgage lender to uncover the rules. You don’t want to violate the terms of your mortgage agreement. If you do, you could face legal consequences.
The good news is that you can potentially refinance the loan with a rental-friendly lender if your current lender doesn’t allow this.
Understand the lending rules when renting out your home to buy another
Lenders will impose certain rules for homeowners converting a primary residence into a rental property. They need to be sure you can handle two homes, especially if you don’t have landlord experience.
First, you should see if you qualify for a new mortgage on top of your existing debt, without the help of rental income. If so, you eliminate the need for extra paperwork that verifies future rent on your home.
But let’s assume you need that income to qualify for the new home.
You need to request Fannie Mae Form 1007, which is a Single-Family Comparable Rent Schedule. It’s like an appraisal, but for rental income instead of home value.
This form is completed by a licensed appraiser and can be ordered by your lender. The document compares your home to similar rental homes in your area. It estimates the monthly rent you could earn.
Besides being a loan requirement, the 1007 can give you a good idea of how much rent you can charge.
But even with this form, you need to prove that you have financial reserves to make the payment on the vacated home, should you be unable to rent it. The amount you need in savings, retirement, and investment accounts depends on the mortgage on the home you’re vacating, and the number of financed properties you have.
You will need, in the bank or investment account:
Keep in mind that you don’t need the above-stated reserve amount for the property you’re buying, nor does the new property count as one of the financed properties.
Most buyers who are renting out their house to buy another will have only one financed property by this definition.
For instance, you are living in a home now that you plan to rent out. You have $200,000 in mortgages on the property.
The lender will require that you have $4,000 in available funds as “reserves.” Plus, your lender will provide Form 1007 to determine the estimated rent.
Again, you can skip all these requirements if you don’t need the rental income on your current home to qualify for the new loan.
Talk to your homeowners insurance company
If you move forward with renting out your home, you’ll likely need to add more coverage to your homeowners insurance policy. That’s because most traditional homeowners insurance policies don’t cover rental-related issues.
Pros and cons of renting out your house
Every financial decision comes with advantages and disadvantages. Here are some things to keep in mind when learning how to rent out your house and buy another.
can i use my house as collateral to buy another house
Using a Home Equity Loan To Buy Another House
The short answer to the question of whether you can use a home equity loan to buy another house is yes, you generally can. Bear in mind, however, that some lenders may have restrictions on the source of your down payment and may not be willing to issue a mortgage on the new home if you’re using a home equity loan for that purpose. Of course, that will not be a problem if you are paying all cash for the new home.
Unlike a home equity line of credit (HELOC), which provides a revolving line of credit, a home equity loan gives you the entire loan amount up front. The amount will depend on how much equity you have in your home, its market value, and how much you want to borrow. Your income and credit history will also affect the loan amount. Most lenders will cap the total amount at a percentage (usually 85%) of the home’s value. When your home equity loan closes, you’ll receive the full proceeds and can then spend the money to buy another house or do whatever you want with it.
Pros and Cons of Using a Home Equity Loan To Buy Another House
The major advantage of using a home equity loan to buy a second home is that it may be your best (or only) significant source of funding if you find yourself house-rich but cash-poor. Another potential plus is that interest rates on home equity loans often will be lower than other forms of borrowing, though they are typically higher than interest rates on a mortgage.
The biggest downside of using a home equity loan for buying another property—or for any other purpose—is that you are putting your primary residence at risk because it serves as collateral to secure the loan. If you find yourself unable to make the payments on your home equity loan, the lender could foreclose on your home and evict you.
An additional danger is that by taking on a home equity loan, especially if you still owe money on your first mortgage, you could find yourself overwhelmed by debt if you face an unexpected financial reversal, such as a job loss or big medical bills. Indeed, you could wind up obligated to pay off three mortgages at once: the remainder of the mortgage on your primary residence, a mortgage on your second house (if your loan isn’t large enough to buy the house outright), and your home equity loan.
Finally, another downside is that you’ll have to pay closing costs on the home equity loan, which could be 2% to 5% of the total loan cost. You’ll also have to pay closing costs on the home that you’re buying.
If real estate market conditions change and the value of your home declines significantly, you could end up owing more on your home than it is worth.
Alternatives To Using a Home Equity Loan to Buy Another House
Before you apply for a home equity loan to buy another house, it’s worth considering the alternatives. They, too, have advantages and disadvantages.
Cash
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. Of course, if you have that, you shouldn’t be seeking a loan at all.
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 a HELOC, but if the personal loan is unsecured, 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 high closing costs.
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 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
If you are age 62 or older and looking to become a landlord in your retirement, you could take out a federally insured home equity conversion mortgage (HECM), a federally backed reverse mortgage, to buy a property that includes rental apartments to provide you with an income stream in your later years. Another option is to buy a new single-family house or condo with the reverse mortgage and rent your previous home. The reason: You must live in the home on which you have a reverse mortgage.
An 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 off the mortgage 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, then you, your spouse, or your estate must pay off the mortgage 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 any rental property you own could possibly pay off the reverse mortgage.
Can You Use a Home Equity Loan To Make a Down Payment on a Home?
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 money from a mortgage, you may need to shop around to find one that does.
How Much Money Can You Get From a Home Equity Loan?
Typically, you can borrow as much as 85% of your home equity. However, you may have to pay several thousand dollars in closing costs, so you won’t walk away from the deal with the full 85%.
What Are the Risks of Using a Home Equity Loan to Buy Another House?
The major risk of a home equity loan, as with a regular mortgage, is that it is secured by your home. This means that if you are unable to keep up with the payments, your lender could seize the home, sell it, and evict you. Instead of a home equity loan, you also may be eligible for an unsecured personal loan, which won’t put your house at risk but will typically have a higher interest rate.
Which Is Better: A Home Equity Loan or a Home Equity Line of Credit (HELOC)?
That depends on why you need the money. A home equity loan may be better if you need a lump sum of money at a particular time—such as to purchase another home. A home equity line of credit (HELOC) could be better if you don’t need the money all at once but expect to spend it in stages. Some lines of credit remain open for as long as 10 years.
From an interest-rate perspective, a home equity loan may be safer because its interest rate is fixed, while the rate on a HELOC is variable. Borrowers with HELOCs have some protection in the form of caps on how quickly their interest rates can rise, although that can vary from lender to lender.
using home equity to purchase new home
Can you use a home equity loan to buy another house? The short answer is yes, although the advantages and disadvantages of this course of action may depend on what the second property is used for. It could also be a good option for those interested in buying an investment property.
In this article, we will explore home equity loans, how they can be used to obtain property, and both the benefits and drawbacks of using your equity to buy a second house.
What Is A Home Equity Loan?
To understand how to use home equity toward your next property purchase, you must first understand how a home equity loan works. A home equity loan is a type of second mortgage that allows you to access the equity you’ve built in your home.
Home equity is the difference between what your home is worth and what you owe your lender – also known as the amount of your home that you actually own. As you make mortgage payments and reduce the balance of your loan, you build equity. With a home equity loan, you can receive that money with a lump sum payment that is then paid back to the lender in fixed installments overtime.
Using A Home Equity Loan To Buy A Second Home Vs. An Investment Property: What’s The Difference?
If you’re considering using home equity to buy a second house, there’s one important question to ask yourself: Are you buying this property as a second home or as an investment?
These lines can be blurred, but it’s important to have clear goals in mind as they will directly impact your ability to receive financing. Some of the key differences between using a home equity loan for a second home and investment properties include:
Consolidate debt with a cash-out refinance.
Your home equity could help you save money.
Advantages Of Using Home Equity To Buy An Investment Property
A home equity loan can make buying a second property less expensive and give more liquidity to the buyer. When using home equity specifically to buy an investment property, there are a few distinct advantages.
You Could Increase Your Down Payment
Home equity loans are received in a lump sum payment, giving you more cash to use toward your next property. By choosing to put more of that money toward your down payment, you can potentially lower your monthly payments and interest rates.
You Could Solve Financing Challenges
Second properties are typically more difficult to finance due to stricter down payment requirements, making a home equity loan a more convenient and affordable solution for most borrowers looking to buy investment properties.
Interest Rates Will Likely Be Lower
Lenders spend less time originating home equity loans, which may save you money, as it typically means lower fees and closing costs. But perhaps the biggest advantage of this option is the potential to lower your interest rates.
Home equity loans offer lower interest rates because they are secured by collateral in the form of real estate. This means by utilizing a home equity loan, you can avoid the hefty interest rates you would encounter through other forms of financing, like hard money and personal loans.
Disadvantages Of Using Home Equity To Buy An Investment Property
Despite the benefits of using home equity to buy an investment property, there are also some potential risks.
You Are Trading Assets In For Debt
Getting a home equity loan means turning assets into debt because you are effectively taking the part of your home that you own and tying it up in another loan. Although this may be worth it in some scenarios as it prevents you from having to withdraw money from existing investments, there are also implications to having higher debt that you must consider.
You Are Leaving Yourself Vulnerable To Shifts In The Housing Market
All homeowners are technically vulnerable to these shifts, but by owning two properties, you are essentially doubling your potential risk to changes in the housing market. If either home’s value lessens, you may end up owing more on your mortgage and home equity loans, which can spread some homeowners too thin.
And if you default on the loan, you could potentially lose both your primary and secondary properties, as both are held as collateral. You should also note that reduced market values could affect your ability to resell the investment property.
You Could Have Three Mortgages For Only Two Homes
A home equity loan is often taken out in the form of a second mortgage. Combine this with the financing you will need for your second home, and it’s likely you will end up with three mortgages for only two properties.
Although this is important to remember, it’s not necessarily a deal breaker, as it’s no worse than having two mortgages and another loan – which would likely have higher interest rates.
Your Home Equity Loan Interest Payments Will Likely Not Be Tax-Deductible
In 2018, changes to tax codes led to somewhat ambiguous guidelines for investment properties. Because of this, we recommend consulting with an accountant before making any decisions. However, if the home equity loan is not specifically being used to improve the property it was taken out against, it’s likely it will not be tax deductible.
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Taking Out A Home Equity Loan To Buy Another House: FAQs
To fund a property purchase, should I get a lump sum home equity loan, HELOC or a cash-out refinance?
As opposed to the one-time, lump sum payment received through a home equity loan, HELOCs, or home equity lines of credit, function similarly to a credit card, as they allow you to access and utilize the equity as you choose – up to a certain limit and within a certain time frame. Although HELOCs can offer more flexibility than home equity loans, they also come with higher closing costs and variable interest rates, which may mean paying more over time. Rocket Mortgage does not offer HELOCs.
Another option to consider is a cash-out refinance, which allows you to take on a larger mortgage in exchange for accessing equity in your home. Because it’s a form of refinancing and not a second mortgage, a cash-out refinance doesn’t add to your monthly payment and instead extends the length of the original loan.
There’s a lot to consider when choosing between a HELOC and a cash-out refinance, but if you’re planning to use your money as a lump sum as you would with a down payment, a cash-out refinance or home equity loan will probably make more sense.
When can I sell my house after I take out a home equity loan?
There’s no set time limit for how soon you can sell your house after taking out a home equity loan. However, in any mortgage transaction, paying off liens is necessary to sell the property. This is due to the fact that your home is held as collateral on the loan, but it doesn’t mean you have to wait to sell.
If you choose to sell your house while still making payments toward your primary mortgage and home equity loan, you will be able to pay off these liens from the home sale’s proceeds. For example, if you sell your home for $350,000 while owing $150,000 on your mortgage and $50,000 on your home equity loan, that money due will be deducted from your home’s sale, leaving you with $150,000 in profits.
Will a home equity loan put my mortgage underwater?
An underwater mortgage is a home loan with a higher principal than the home is worth. This typically occurs when a property’s value falls while the homeowner is still repaying the original balance of the loan. Although it’s not likely that a home equity loan will directly lead to an underwater mortgage, you will be at a higher risk due to owing more on the property.