Have Home Equity? Experts Explain Why You Should Use It To Buy Another Home
Written by
Jordan Rosenfeld
Edited by
Chris Cluff
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Real estate is almost always a good investment because it has a tendency to appreciate in value over time, meaning you can earn equity pretty quickly. When the market is hot, your equity can abound at significant rates.
Having home equity allows you access to cash in the form of lines of credit or home equity loans, and putting that money back into a second home could net you the most benefits of all.
“I strongly believe that utilizing the equity in your home can be a smart and advantageous move to include in your financial plans such as investing, tax planning and increasing income,” said Jonathan Faccone, managing member and founder of Halo Homebuyers.
He and other experts explain why this is a great investment.
You Don’t Have To Save Up for a Down Payment
When you use the equity in your current home to purchase another property, you’re leveraging the value of your current home without having to save up for a large down payment, according to Faccone.
Moreover, it might also enable you to provide a larger down payment for the new property, according to Mike Qiu, owner of Good As Sold Home Buyers. This translates to a smaller mortgage amount, lowering your monthly payments and potentially improving your chances of loan approval.
“You can potentially increase your overall net worth by owning multiple properties in different locations,” Qui said. “This way, you can diversify your real estate portfolio and reduce risk as you are not solely dependent on one property for your investment returns.”
It Brings Tax Benefits
Owning homes also brings tax benefits, Faccone said. “The interest on the mortgage of a second property is tax-deductible, which can help offset some of the costs associated with owning and maintaining multiple properties.” This can result in significant tax savings and increase your overall return on investment.
Additionally, if you use the equity in your home to buy a rental property, you can also deduct expenses such as repairs, maintenance and property taxes from your taxable income, he explained.
You Can Get Better Loan Terms
Another reason to use equity to purchase a second home is the fact that the loan terms will most likely be favorable when compared to taking out a traditional mortgage, according to Brian Mollo, licensed realtor and CEO of Trusted House Buyers.
That’s because home equity loans and home equity lines of credit (HELOCs) typically offer lower interest rates compared to unsecured loans like personal loans, Qui said. “This can lead to significant savings on borrowing costs.”
It’s a Way To Diversify Your Investment Portfolio
Real estate is one way to diversify your portfolio, as well, Mollo said. “If you have a lot of your investments tied up in stocks and other financial products, a rental property or a flip can be one way to ensure you have some income during retirement. By using your current home’s equity, you are avoiding a second mortgage and getting the benefits of real estate investment.”
You Can Build a Passive Income Stream
If you buy a second home with equity, you can turn a second property into a rental, which can be a great way to generate cash flow with minimal work. “This rental income can be saved, used as a path toward financial freedom or reinvested into improving the property,” said Maria Simonetti, realtor with The Simonetti Real Estate Team.
You really can’t lose by buying property, she pointed out. “Historically, and over the long term, real estate appreciates in value. If the property cash flows, you can weather the storms of any market downturns while making a profit to eventually enjoy asset appreciation.”
A Few Caveats
While all of these benefits are well worth the downsides, Qui did mention that you should keep in mind some of the risks, such as increased debt, management responsibilities and potential risk of default or foreclosure if you can’t make mortgage payments.
So long as you do careful assessment and research, and work with trusted real estate professionals, buying a second home could be financially advantageous.
More From GOBankingRates
