How to use home equity to buy another house

Written by melvin richardson
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How to use home equity to buy another house
Using equity to purchase another home (new home for sale image by itsallgood from Fotolia.com)

When looking for leverage to purchase another home, the equity in your home could be a good source. The amount of equity you have will determine how much of a home you can purchase, assuming you don't have other sources of funding. Equity is determined by taking the fair market value of your home and subtracting the balance from your first mortgage. You will not be able to make use of all the equity in your home. Many lenders will loan you a certain amount.

Skill level:
Moderate

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Instructions

  1. 1

    Find out how much equity you have in your home. If your home is worth £65,000 and your first mortgage balance is £16,250, you have approximately £48,750 of equity in your home. Many lenders will let you tap into approximately 75 per cent of your equity. When you take £65,000 and multiply it times 75 per cent, you get £48,750. Subtract the first mortgage balance of £16,250 from £48,750, and you have £32,500 of usable equity to put toward another home. If your second home costs more than £32,500, you will need to get funds from another source.

  2. 2

    Determine the type of equity source. You can receive a home equity line of credit or a home equity loan. A line of credit will have a variable interest rate. You will be able to borrow against the credit line for a predetermined period of time, such as 10 years, which is called the draw period, according to the Federal Reserve. The terms and conditions will determine if your loan needs to be paid off after the draw period. Once approved, you are approved for a line of credit which you can use at your convenience. A home equity line of credit will allow you to pay interest only so that your monthly payments are lower. If you decide to take a home equity loan it will be for a certain period of time, such as 15 years. Your payments will go toward principal and interest. The interest rate will be fixed, which means your payments will not change.

  3. 3

    Locate the home you want to buy. You can locate a home by using a number of resources such as a real estate agent. They have access to a number of homes that are selling, as well as the condition, location, type of home and characteristics of the home. You may be able to purchase a home from a private owner. When you have found the home you are interested in, have the mortgage documents prepared and filed with the courthouse in the county where the property is located. There will also be some costs involved, such as an appraisal, title insurance, credit report, inspection and closing costs.

Tips and warnings

  • When you use the equity in your home, the lender can foreclose if you miss payments. Your home is the collateral for the loan.

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