When you have built up enough equity in your property, you can use it for almost anything, in fact, you can even invest on another real estate property. But first, let us go over the advantages and disadvantages of leveraging home equity for a second property down payment.
This is how you can use home equity as a down payment for a second home – You’ll need at least a 10% payment to qualify for a second house. If you intend to utilize the home only as an investment property, a 15% down payment is normally necessary.
On a home equity loan, you will get a one-time payment. You would pay it back over a fixed period in predetermined monthly instalments. A continuous credit line, on the other hand, is known as a HELOC. If you do not go over your credit limit, you can use the credit line as many times as you want, and you just pay interest on the amount you use. Borrowing and selling are two traditional approaches to use home equity for a down payment on a second house:
- A home equity loan, or
- A home equity line of credit (HELOC)
Set funds aside!
It seems logical to set away money for unexpected expenses. If you want to make a substantial down payment with cash from your account, make sure you have some cash reserves available if required. If you pay cash for your second home, the mortgage loan payment write-offs will be minor, but you may incur some passive losses.
New Mortgage loan option
The interest rates on your second home mortgage should be much lower, especially if you put down a big 20% to 30% down payment. In any event, getting a mortgage loan for your second property should be simple. Look for low-interest mortgage rates.
If you are considering buying a second house that is far away from your first, keep in mind that you will have to leave one of your properties unattended for long periods of time and will need someone to look after it. Set aside about 1% of the purchase price of your second property for yearly maintenance, plus another 0.5% if you are buying an older home.
Furthermore, if you plan to buy a second home that is far away from your first home, keep in mind that you will be gone from one of your properties for long periods of time and will require someone to maintain that home. Set your budget and set aside around 1% of the purchase price of your second home for annual maintenance, plus an additional 0.5% if you are buying an older home. One benefit of not collateralizing or using your first property to buy your second property is that you will still own a completely paid-for house in the event of a major market crash or other severe depreciation situation.