As the housing market continues to shift in unpredictable ways, you may be interested in finding another property to rent or use on vacation before prices increase again. If you currently own a home and are looking to purchase another one, you may be wondering if it’s possible to tap into your current home’s equity in order to cover the down payment on a new property. Taking out a home equity loan can be a great way to leverage your current assets towards a new purchase. Here’s what you should understand if you decide to refinance your home to pay for another property.
The basics of a home equity loan
First and foremost, it’s absolutely possible to refinance a home loan as a way to work towards making a down payment. When you take out a home equity loan, you are effectively guaranteeing that you will be able to pay it back by leveraging the value of your current house. You have two options when utilizing your home’s existing equity to finance a purchase. The first choice you can opt for is a traditional loan, which is a single lump sum. The other option you have is the chance to take out a home equity line of credit. If you know that you’re interested in using your home’s equity to pay for a downpayment, then you’ll likely want a loan, as down payments are typically fixed amounts. If you’re tapping your home equity for renovations or additional construction, however, you’ll likely want to opt for a home equity line of credit, since you may not know the exact amount you’ll need up front.
Take advantage of savings when refinancing
One major benefit of refinancing your current home to buy another house is the potential for savings that you didn’t have on your initial home loan. For example, depending on the tax laws governing your city of residence, you may qualify for certain write-offs and deductions on your second home loan. Additionally, you will likely save money on closing costs when you take out a home equity loan to pay for a second property. That’s because you have the opportunity to avoid title insurance costs and some other fees that you’ve already paid on your first home. This helps you save on a second home purchase, ultimately making it incredibly cost-effective to refinance your house to buy another house. Finding a local option to buy from or sell to, such as Sell Quick California who proudly share that we buy houses in California, will ensure that you know about the appropriate local tax breaks that may apply to your situation.
Risks to be aware of
While there are plenty of advantages to taking out a home equity loan or line of credit in order to buy a new home, it is important that you understand some of the potential risks you are exposing yourself to by refinancing. One of the downsides of taking out a home equity loan is that interest rates are usually higher than traditional home loans. Another risk of a home equity loan is that if you default on your loan, you are putting your primary residence on the chopping block. In fact, banks can actually foreclose on your home in order to repay their loan. Additionally, there are some costs that can’t be rolled into the loan, so it’s important to budget for those as you determine the best course of action to take.
If you already own a home, refinancing your current house to pay for a down payment can be a great way to get funding for a new property. As long as you’re confident that you will be able to make all necessary loan payments, the pros far outweigh the cons, enabling you to pursue a second mortgage without breaking the bank.