Can you use a HELOC to buy another house?
A home equity line of credit (HELOC) can be used for any type of purchase, including buying a second home or investment property. If you do not have the cash on hand to purchase a second home, applying for a HELOC to buy a second home could be a good option and easier than applying for a traditional mortgage.
Read on to learn more about using a HELOC to buy a second home.
At Credit Union of Southern California (CU SoCal), we make getting a Home Equity Line of Credit (HELOC) easier.
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What are HELOCs and how do they work?
A HELOC is a type of secured loan that lets you borrow money as a line of credit. A line of credit limit is determined by the lender based on several factors, including the equity in your home, your property’s fair market value, and your credit score. Generally, the more equity you have, the higher the line of credit you’ll be approved for.
A secured loan requires the borrower to pledge an asset as collateral to “secure” the loan. With a HELOC, your home is the collateral securing the loan. This means if you fail to repay the loan the lender can foreclose and take your home.
Getting a HELOC is a straightforward process, and many homeowners benefit greatly from their HELOC. HELOC funds can be used for anything, including making home renovations, paying off high-interest debt, paying for college tuition, and even as a down payment on a second home or investment property.
Advantages to using a HELOC to buy a second home
- Easier to qualify for. A HELOC secured by your primary residence is generally easy to qualify for, if you have positive equity, a good credit score, and a favorable debt-to-income ratio.
- Flexible repayments. HELOCs can be repaid “interest-only” during the initial draw period, making the payments somewhat lower than during the repayment period when payments toward principal must be paid as well.
Disadvantages of using a HELOC to buy a second home
- Interest rate may be higher than a traditional mortgage. HELOCs come with a variable interest rate and the rates in general tend to be higher than traditional mortgage interest rates.
- Potential to lose your home. A HELOC is a type of second mortgage. Any loan based on the equity on your home is considered a lien, meaning that if the loan is not repaid, the lender can foreclose on your home to recover the value of the money you owe.
- Negative equity risk. Keep in mind that because a HELOC is secured by the equity in your primary residence if you sell your primary residence the HELOC will need to be paid-off. When you owe more than your home is worth, it is called being “upside-down” or underwater. You may not be able to sell your home in this case, because doing so would result in you owning money to the lender.
- Costs. HELOC closing costs tend to be lower than closing costs on a traditional mortgage, but each lender will have a different fee schedule. You may need to pay for a credit report, property appraisal, and lender fees.
What to consider before using a HELOC to buy a second home
Before applying for and using a HELOC to buy a second home ,it’s essential to be clear on your financial position and financial goals. Here are some financial considerations to keep in mind when using a HELOC to buy a second home:
Second home vs. investment property. If the property is used as a second home, you’ll need to be sure you have sufficient income to make the monthly repayments with interest added. Purchasing an investment property with a HELOC could be a good financial strategy due to the monthly income you may earn as you rent the property. However, do the math before you commit to using a HELOC to buy a second home. Your monthly interest payments could be more than the monthly rental income you take in, which means you’ll be losing money on your investment each month that the HELOC isn’t paid off in full.
Repayments. While applying for and
getting a HELOC can be a straightforward process, making
HELOC repayments could be challenging if you don’t budget carefully.
All HELOCS have a “draw period” (typically 10-15 years) and a “repayment period” (typically up to 20 years). During the draw period, you can borrow as much of the funds as you need. Payments made during the draw period are calculated as “interest only,” meaning you aren’t repaying the entire loan or the principal amount. Some lenders will allow payments toward principal during the draw period, to help make it easier for people to manage their finances by avoiding a large “balloon” payment when the repayment period starts. HELOC repayment period. After the draw period ends, the HELOC repayment period begins. At this time, most HELOC interest rates will adjust to a fixed rate and monthly payments will include both principal and interest on the outstanding balance.
Alternatives to using a HELOC
Saving money for a second home or investment property takes time and dedication. If a HELOC isn’t right for you, consider one of these down payment options:
Home equity loan. One of the most significant benefits of a home equity loan is the fixed interest rate, which makes it easy to budget your expenses each month and there are no surprises as with a variable interest rate HELOC.
Cash-out refinance. Cash-out refinancing is when a homeowner refinances their mortgage to a new mortgage (typically at a lower interest), and in the process, borrows more money than what is needed to pay off the current mortgage. The first mortgage is paid off and the homeowner gets a lump-sum payout of the extra cash amount at closing.
Cash. Saving up cash to purchase a second home takes time, but the advantage is you’ll save money by not paying loan interest.
Why Savvy Consumers Choose CU SoCal
For over 60 years, CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Get Started on Your Home Equity Line of Credit Today!