How to Use Home Equity to Purchase Another Home

According to data from Black Knight, American homeowners gained a record $9.9 trillion in “tappable equity” by the end of 2021 following the increase in home prices that year. What does that mean for you? You have access to cash to either purchase a larger home or purchase a 2nd home and keep your current home as an investment property.

What is equity? Equity is the difference between what your home is worth in the current real estate market and how much you currently owe against it. For example, if your home has an appraised value of $310,000 and your mortgage balance is $150,000, that means you have $160,000 in home equity, aka, cash. Lucky you!

So, how do you get access to the equity in your home? There are a few ways to accomplish this.

1. Cash-Out Refinance

2. Home Equity Line of Credit (HELOC)

3. Home Equity Loan or Second Mortgage

A cash-out refinance means you go to your lender and refinance your home as a “cash-out” refinance. You are basically replacing your current home loan with a new home loan with a higher balance. The difference between the two loans is the amount of cash you withdraw from the total equity in your home.

A HELOC is a revolving line of credit that you can use to finance other purchases, including a home. Some HELOCs can have variable rates but some have a fixed rate for a fixed amount of time. Look for a lender that can provide what you are comfortable with. In this case, your lender will appraise or value your home and you put the equity amount you’ve gained in an account so you have instant access. You use the funds as you need them so you don’t have to take them out in one fell swoop.

A home equity loan is basically a second mortgage on your home. You leave your original mortgage in place and borrow more using your home as collateral. Again, the lender will place a value on your home because you cannot take out a loan for more than your property is worth.

All lenders have rules and regulations to follow with each program they offer. Talking to your lender about your specific situation is always advised. What makes real estate a great investment is that you can put 20% down but you get 100% of the appreciation.