Rene Munoz

Mortgage Loan Originator

NMLS# 242107

281.541.1948

Can I Use a Home Equity Loan to Buy a Vacation Home?

Can I Use a Home Equity Loan to Buy a Vacation Home?

If you’ve been dreaming about buying that property at your favorite vacation spot but not sure how you’d ever save up for it, there may be an option you haven’t considered: using the equity from your current home to pay for the vacation home with a home equity loan.

What is a Home Equity Loan?

If you’ve built up a significant amount of equity, mortgage lenders will let you borrow a chunk of that with a home equity loan. And equity, in case you’re wondering, is the share of the home you own. It is the difference between the value of your house and how much you owe on your mortgage. Say for example, your home is worth $500,000 and you only owe $300,000 on your home loan. Your current home equity is $200,000.  You gain equity by paying down your mortgage and by value increases in the housing market. The U.S. real estate scene has exploded over the past three years, so most people who bought before then have seen a huge increase in their property value simply because home buying prices have risen so much.

With a home equity loan, you can typically borrow up to 80% of your current equity. In the example above, that would mean you could pull $160,000 out of your home to pay for your vacation property or at least for a portion of it.

The application process is very similar to that of a first mortgage. Your current home will need a new appraisal and you will need to provide your financial data. The lender will probably run a credit check and verify your assets and employment. 

You will receive the money in a lump sum when the home equity loan closes and you will start making repayment immediately. 

Pros 

  • Flexibility - There are no stipulations placed on how you can use home equity loan money. That gives you flexibility when it comes to buying a vacation home. It's up to you whether you use it for an all-cash purchase or just a large down payment. You could also use some of the lump sum as a down payment and reserve some for renovations or repairs on the second home.
  • Fixed Repayment Schedule - Home equity loans come with a fixed interest rate and consistent monthly payments. This makes it easy to anticipate the costs and build into your budget.
  • Easier to Qualify - Because the home equity loan is tied to a property you currently own, it may be easier to qualify for than for an actual vacation or second home loan.

Cons

  • Closing Costs and Fees - While that big chunk of equity can go a long way in helping you obtain your dream vacation house, you will have to set aside some cash for the loan closing costs, which can offset the total amount of money you have to spend on the second home. 
  • Higher Interest Rates - While still lower than most market rates on things like cars and credit cards, home equity loan interest rates are higher than primary mortgages. It’s a good idea to know how much you will end up paying in interest over the course of the loan to see if it’s worth it.

If you have a considerable amount of equity, tapping into it for buying a vacation home might be the fastest way to your dreams.

Give us a call today! We'd love to help you buy the vacation home of your dreams.