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Is it smart to use home equity to buy a second home?

There are multiple advantages to using your existing home equity to purchase a second home. Getty Images/iStockphoto

Homeowners have multiple ways to grow their wealth, from investing in the right assets to saving in the best accounts to refinancing when rates are advantageous. Those who have enjoyed the financial security of homeownership may also consider extending that support with a second home. Buying a second home can provide multiple financial advantages for homeowners if done smartly and comprehensively. However, securing the financing to complete the purchase may prove difficult. 

Fortunately, there is one way that owners can access large sums of money, and its right at their fingertips: their home equity. The average amount of home equity is high right now, giving owners a great funding source to purchase a second home. But is it smart to do so – or are owners better off looking for alternative financing? That's what we'll break down below.

Start by checking home equity loan options here to see what you're eligible for.

Is it smart to use home equity to buy a second home?

Here are three reasons it may be smart to tap into your existing home equity to buy another home or rental property.

You may have a lot to utilize

If you live in a region of the country that has seen home prices rise, you may have a significant portion of home equity to utilize now. The average homeowner has around $200,000 of equity in their home currently and, depending on where you live and how long you've lived there, you may have even more. 

Considering that lenders will usually allow owners to access 80% to 90% of their existing home equity, that means you could have $160,000 to $180,000 of usable money to put toward a second home now. It could be smart to access funding this way, particularly if you know you'll be able to successfully pay it back with rental income from the second home. 

See how much home equity you could borrow now.

Rates are lower than popular alternatives

It's not especially smart to use some popular credit alternatives right now, but especially not for major purchases like second homes. Credit card rates hover around 20% right now while personal loans are often in the double digits, too. 

Home equity and home equity line of credit (HELOC) rates, however, are just 8.66% and 8.98%, respectively. Because your home is used as collateral in these situations, lenders tend to offer more competitive rates. But if you have an efficient plan to pay it back, then it could be worth it to buy a second home, as the other credit options right now are cost-prohibitive. 

Your other savings won't be touched

While there are multiple ways to finance the purchase of a second home, many of them will require you to tap into your cash, savings or retirement funds to do so. And right now you'll want to avoid taking that step. With interest rates on high-yield savings and certificates of deposit (CD) accounts higher than they've been in years, it behooves savers to leave their money in those accounts untouched, giving them freedom to grow at today's elevated APYs. Plus, if you withdraw funds from a CD early, you'll likely get stuck with an early withdrawal penalty.

By using your home equity to buy a second home instead, your savings will remain where they are, and you can instead focus on growing your overall wealth with your new real estate investment.

The bottom line

If you know you want to buy another home but aren't sure about how to pay for it, consider using a home equity loan or HELOC today. Both options allow you to tap into what may be a significant sum of money at a lower interest rate than other popular alternatives. And by going this route you'll leave your traditional savings, investments and retirement accounts untouched. That all being said, remember that your first home is the collateral in these situations so you'll want to have a comprehensive and well-thought-out plan before buying another property this way. Otherwise, you could jeopardize your initial investment. 

Learn more about your home equity loan and HELOC options online now.

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