Using a Home Equity Loan to Purchase a Second Home

If you want to purchase a second home, there are a number of different ways that you could potentially do so. One way to purchase a home involves using a home-equity loan on your primary residence. Here are a few things to consider about using a home-equity loan to purchase a second home.

How It Works

With this process, you will need to locate a home-equity lender that you can work with. You will also need a substantial amount of equity in your primary residence. You will work with the lender in order to obtain a home-equity loan on your house. You will then take the money that you get from the home-equity loan and purchase the second home. You will then have a home-equity loan payment to make for the purchase of a second home.

Less Scrutiny

One of the reasons that you might want to consider doing this is the relatively low level of scrutiny on the part of most lenders. In most cases, getting a home-equity loan is going to be much easier than getting a second mortgage. Many homeowners routinely get home-equity loans without any problems. However, when you try to get a second loan, the lender is going to have much stricter criteria. For example, with a second mortgage, many lenders will have very high cash-reserve requirements. They might want you to have enough cash to cover both mortgages for at least six months if you were to lose your job. The credit score requirements are usually higher for a second mortgage as well.

Closing Costs

Another reason that you might want to consider using this strategy is the lack of closing costs. With a typical mortgage, you will spend thousands of dollars in closing costs. It is not uncommon to spend somewhere between $4000 and $6000 on closing costs on the loan. With a home-equity loan, you will not have to worry about these closing costs in most cases. Most home-equity loans have very low closing costs if any at all. This can result in a significant savings for you during this process.

Collateral

When you use a home-equity loan to purchase a second home, you are keeping all of the risk on your primary residence. The collateral for both your existing mortgage and the home equity loan is your primary residence. This essentially means that you own the second home free and clear. If anything were ever to render you unable to make your mortgage payment or your home-equity payment, the lenders would not be able to foreclose on the second home. This is creating a scenario in which you are the owner of a piece of property without any type of debt against it.

Shorter Term

Although this strategy can work, it does provide you with a shorter time frame in which to pay off the loan. Most home equity loans last for only about 10 years, while many mortgages last for 30. This can make the payment larger than some people are able to afford.