Can you use your home equity to buy land?

For many people, their home is their largest and most valuable asset. As you pay down your mortgage over time, you build equity in your home, which is the difference between what your home is worth and how much you still owe on your loan. This accumulated home equity represents a significant financial resource homeowners can tap into for several purposes. 

Homeowners have a lot of equity to work with right now. Over the last few years, sustained demand for real estate and low inventory in most markets have caused home values to skyrocket nationwide. That, in turn, has resulted in the average homeowner having about $299,000 in home equity currently — about $198,000 of which is tappable. 

But while you can use your home's equity to fund necessary home repairs and renovations or consolidate high-interest debt, is it possible to use your home equity to purchase other real estate, such as vacant land? Here's what you should know.

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Can you use your home equity to buy land?

The short answer is yes, you can generally use your home equity to buy land. There are a few different ways to go about it. 

The most straightforward approach is to take out a home equity loan or a home equity line of credit (HELOC) and use the funds to purchase the land. With a home equity loan, you borrow a lump sum of money against the equity in your home, while a HELOC functions more like a credit card, allowing you to borrow money up to a certain limit. 

Both home equity loans and HELOCs come with low average rates right now compared to many other sources of funding. In turn, both can be a smart option to consider if you want to buy land but don't have the cash on hand to do it.

Another option is to refinance your existing mortgage with a cash-out refinance and borrow the cash you need for the land purchase in the process. This allows you to access your home equity but replaces your current mortgage with a new one, potentially at a different interest rate and terms. You would then use the cash from the refinance to buy the land. 

However, cash-out refinance loans may not be the best move right now, as mortgage rates are a lot higher than they were just a few years ago. So, if you replace your current mortgage loan with a new loan at a higher rate, you could end up paying a lot more in interest over the life of your loan.

But no matter what option you choose, the main benefit of using your home equity in this way is that it allows you to leverage the value of your home to fund the purchase of land rather than having to come up with the full purchase price in cash upfront. That can be useful when your cash reserves are limited but you need or want to make a land purchase. 

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How can you use your home equity to buy land?

The process of using your home equity to purchase land typically involves a few key steps:

• Start by determining your home's current market value. This will help you understand how much equity you have available to borrow against.
• Research lenders and get pre-approved for a home equity loan or HELOC. This will give you a better idea of how much you can borrow and with what terms. Be sure to compare at least a handful of different options during this process to ensure you're getting the best rate and terms possible for your unique situation.
• Find the land you want to purchase and negotiate the sale price with the seller.
• Once you have a signed offer on the land, apply for a home equity loan or HELOC and use the funds to pay for the land.
• Work with a title company to complete the land purchase and transfer of ownership.

It's important to note that the specific requirements and process can vary depending on the lender, your financial situation and the location and characteristics of the land you're buying. You'll want to carefully consider the costs and risks involved, as using your home equity does put your primary residence on the line as collateral.

What are the benefits of using your home equity to buy land?

There are several potential benefits to using your home equity to purchase land, including:

• Access to financing: By tapping into the equity in your home, you can access a source of financing that may be more readily available and affordable than other options, such as using your cash savings for this purpose.
• Flexible terms: Home equity loans and HELOCs typically come with a range of repayment terms to choose from, allowing you to pick a loan duration that fits your financial situation and goals.
• Lower interest rates: Home equity financing typically has lower interest rates compared to other types of loans, making the overall cost of borrowing potentially more affordable.
• Potential tax benefits: In some cases, the interest paid on a home equity loan used to purchase land may be tax-deductible, providing an additional financial benefit.
• Preserving cash flow: By using your home equity, you can preserve your cash savings for other purposes, rather than depleting them for a land purchase.
• Building a diversified real estate portfolio: Owning both your primary residence and a separate parcel of land can help diversify your real estate holdings and potentially provide opportunities for future development or investment.

The bottom line

While you can use your home equity to purchase land, it's important to carefully weigh the potential benefits against the risks, which can include losing your home to foreclosure if you're unable to make the loan payments. The value of the land you purchase and the overall real estate market conditions can also impact the long-term financial viability of using your home equity in this way. So, be sure to consider and the factors before taking this route to ensure it aligns with your goals and risk tolerance.