If you’ve ever thought buying a vacation home was beyond your reach, think again. There are ways to use the equity in your main home to purchase a second home as a vacation property. However, there are more challenges in buying a second home than a primary one, so be sure to research all your options before settling on one that’s right for you.
It’s also helpful to ask your trusted real estate agent skilled in assisting buyers with their vacation home purchases. Bottom line is: tapping into the equity in your current home is a viable option for second home ownership.
Home Equity Options
You have a few options at your fingertips when it comes to using home equity for a vacation home. Here’s a look at them.
Home Equity Loans and HELOCs
A home equity loan provides you with a lump sum of money at a fixed interest rate that’s higher than a HELOC (home equity line of credit). You would essentially make a home equity loan payment each month on top of your monthly mortgage payment for your primary home.
HELOCs are a type of second mortgage, with the loan being secured by your primary residence. This works as a line of credit where you make withdrawals as needed when you need the money. HELOCs are most commonly used when homeowners are tackling remodels or paying for college.
While you would pay on a home equity loan or HELOC monthly over the next several years, a cash-out refinance means you have to pay off the existing loan before taking out equity in cash. You are given a new mortgage after you pay off the old one, withdrawing the accumulated equity in the form of cash.
You will make a single payment each month thereafter instead of two. Usually a cash-out refinance is initiated by the homeowner to get a lower interest rate on their mortgage. But keep in mind you’ll pay more interest over time if you extend the new mortgage terms beyond what the original terms were.
This is a worthwhile endeavor when interest rates are low, but not such a great option when interest rates are high – or at least higher than what your current interest rate is.
What to Consider
Before tapping into your equity, consider:
- Not just how much equity you’ll need but how much you’re willing to use on the vacation home purchase.
- How much rental income your second home could generate.
- How a home equity, HELOC or large cash-out refinance payment will fit into your current budget.
- What qualifications you will need to meet in order to access your equity.
For instance, your credit score will have to be run by lenders. If you have a credit score of 620 or less, it will be difficult to get approved. Keep in mind also that credit scores also influence your interest rate.
Contact Berkshire Hathaway Premier Properties for New Home Sales
In the end, it all comes down to smart planning and guidance. That’s why you need an experienced buyer’s agent to help you find a vacation home and provide recommendations of lenders who can help make it a reality. To get started, contact Berkshire Hathaway Premier Properties at 713-862-0000.