Using home equity to buy a second home? Here are the pros and cons
If you're in the market for a second home, you're likely considering your financing options. While a traditional mortgage is one possibility, it comes with its challenges, particularly at today's higher mortgage rates. But that doesn't mean you won't be able to buy the second home you've wanted.
Another option is to use your home equity to purchase your second home. But, before you use your equity for this purpose, it's important to consider the pros and cons.
Compare your home equity borrowing options here now.
Pros and cons of using home equity to buy a second home
If you're thinking about using your home equity to buy a second home, there are a few pros and cons you should know first.
Pros of using home equity to buy a second home
Less cash out of pocket
When purchasing a home you'll likely need to produce quite a bit of cash at closing - your down payment (usually 20% or more of the purchase price) and the costs associated with taxes, insurance, appraisals, inspections and other purchase requirements. Home equity lending options, like home equity loans and home equity lines of credit (HELOCs) can help cover these expenses, resulting in less cash out of pocket for homeowners.
Find out how affordable purchasing a second home with your equity can be today.
Lower interest than other borrowing options
Though home equity lending options typically come with a somewhat higher interest rate than traditional mortgages, they offer competitive rates compared to other financing options like personal loans. To put the difference into perspective, today's average home equity loan interest rate is just 8.59% while the average personal loan interest rate is 12.10% - about 3.51 percentage points higher.
More funding available
"We read every day about how homeowners across the country are sitting on record amounts of equity in 2024," says Joe Salerno, co-founder and chief investment officer at Yardsworth, a real estate company that focuses on equity alternatives. That record equity could mean you have more funding available to purchase your second home than you would with other options.
The average American homeowner currently has around $299,000 in equity in their homes. On average, some $193,000 of that equity can be safely tapped into when you're ready to buy your second home.
Cons of using home equity to buy a second home cons
Though there are good reasons to consider home equity as a way to fund the purchase of your second home, there are drawbacks to consider, including:
Your home may be at risk
When you take out a home equity loan or HELOC to purchase a second home, you're backing the loan by your primary residence. So, if you default on the loan, you could be putting your house in jeopardy. Salerno notes that when taking a loan against your home you're essentially "leveraging your most important asset" for something you may not realistically need. So it's important to be sure you're able to comfortably make your payments before you choose this option.
Home equity rates are typically higher than traditional mortgages
While the average home equity loan interest rate is about 8.59% at the moment, today's average 30-year mortgage rate is just 6.91%. So, if you can use a traditional mortgage, it will likely be a lower cost option than using your equity in the long run.
You'll have an additional payment on your home
If you haven't paid your first home off, taking out a home equity loan or HELOC on it to purchase a second home means that you'll have two monthly payments on it (or more if you've previously accessed equity) moving forward. If you've already paid your home off, you'll go back to making payments on your home until you pay off the money you borrowed against it for your second home.
Tap into your home equity to get the funds you need for your second home purchase now.
The bottom line
Using your home equity to purchase a second home may be advantageous. That's especially the case if you don't have the cash you need right now. But before you use your equity to purchase a second home, consider the pros and cons.
Sure there's may be less cash out of pocket needed, rates are more competitive than some other options, and there may be more funding available. But doing so may put your home at risk, require you to agree to a higher interest rate than you would probably get with a traditional mortgage and involve making more payments on your primary residence.
If you've weighed the pros and cons and believe home equity is best in your scenario, compare your options now.
