Owning a home has several advantages, one of which is the equity you create over time. Currently, the average homeowner has roughly $200,000 in tappable equity, which may be borrowed at competitive interest rates.
What can you do with $200,000 in home equity at your disposal? For some, the solution is to purchase another residence.
You can use the funds from your home equity loan to acquire another home. And there are numerous circumstances where doing so may be a good idea.
A home equity loan or home equity line of credit (HELOC) can help you borrow large amounts of money when needed. Here are three reasons why using that money to buy another home could be a good idea:
1. You have tons of stock but insufficient cash
When buying a new home with a mortgage, a 20% down payment allows you to avoid paying private mortgage insurance (PMI). A 20% down payment on a $200,000 property equals $40,000.
However, if you have limited funds, you may have difficulties obtaining a new home as a vacation or investment property. Alternatively, you may be liable for additional payments associated with the new home, such as mortgage insurance.
A home equity loan could assist. For starters, you often do not need to make a down payment to access your equity. Consider including closing costs in your home equity loan to avoid paying them separately.
2. You want to generate a passive income stream.
If you want to produce passive income, using your home equity to buy another home could be the solution. You can earn passive money with your new property:
- A long-term rental: You can buy a new home to utilize as a long-term rental. This can be completed on your own or with the assistance of a property management company.
- A short-term rental: You can also post the new house for short-term rental on services such as Airbnb and VRBO, as long as you meet all local restrictions and criteria. While the income from a short-term rental may not be as consistent as a long-term rental, you may be able to charge more each day if you rent out your house on a temporary basis.
3. You desire a vacation home.
Your home equity can also help you purchase the vacation house you’ve always wanted. Perhaps you want a lakeside property to get away from city life, or you want to buy a tiny loft in the city to visit during the holidays. Perhaps, you desire a second house closer to your adult children or family members but are not interested in relocating. You can utilize your home equity to cover the price of purchasing a new home, which can be a big investment.