Why now is a great time to use home equity to buy a second home
With the warmer months approaching in much of the country, many current homeowners may contemplate buying a vacation home or rental property. The benefits of buying a second home can be significant but it can be challenging to find the funds to do so. While money saved in savings accounts, certificates of deposits (CDs) and investments may all be tapped into, those accumulated funds may not be large enough to afford a down payment on another home.
Fortunately, there is another funding source homeowners can use to buy that second property: their existing home equity. By utilizing a home equity loan or home equity line of credit (HELOC), owners can access large sums of cash. And since lenders let most owners withdraw approximately 80% of their home equity, that could mean hundreds of thousands of dollars. However, as with all financial decisions, the timing here is key. That said, multiple reasons why now is a great time to use home equity to buy a second home. Below, we'll break down three of them.
See how much home equity you can access here now.
Why now is a great time to use home equity to buy a second home
Here are three reasons why this spring is a great time to use your home equity to purchase a second property.
Home equity levels are high
The average amount of home equity owners have is high right now. According to a 2023 report, the typical equity amount is around $200,000. That's a lot of money that you can access for another home purchase.
Depending on the price of the home you want to buy, it may even be enough to make up the typical 20% down payment most lenders will want you to make. This will then allow you to circumvent private mortgage insurance (PMI). By going this route owners will also avoid tapping into their savings and retirement funds, which can be a major advantage for the right owner.
Learn more about your home equity borrowing options online.
Interest rates are low
While credit card interest rates are around 20% or higher right now and personal loans are frequently in the double digits, home equity loans and HELOCs offer relatively low interest rates. As of March 7, 2024, the average home equity loan rate is 8.66 while the average HELOC rate is slightly higher at 8.99%.
And HELOC rates are variable, meaning they could change over time. And considering that a rate cut is expected for later this year, it could mean that the HELOC rate you buy your second home with now may drop as the year evolves.
There may be less competition now
While home equity loan interest rates are relatively low right now, mortgage rates are still elevated, hovering near their highest point since 2000. This has led to complications with home inventory and sales as many owners have elected to stay put versus selling their existing homes.
This can be beneficial for buyers as less inventory generally means fewer buyers. If rates are cut later this year, however, the real estate market will inevitably heat up again, potentially resulting in more buyers and higher home prices. It makes sense, then, to act now before that happens (you can always refinance to a lower mortgage rate when the market stabilizes).
The bottom line
If you're looking to buy another home but need the funds to do so, now may be a great time to obtain those funds with a home equity loan or HELOC. The average homeowner has hundreds of thousands of dollars to utilize right now and the interest rates on this lending option are relatively low. And, by acting now, before the rate climate changes, buyers may have less competition to contend with. For all of these reasons, now can be a great time to use home equity to buy a second home. Just remember that your original home will be used as collateral when borrowing money this way, so make sure you can pay it back on time before proceeding.
Learn more about your home equity borrowing options here today.
