Persons with a significant amount of equity in their primary residence, can tap into it through a home equity loan. They can then use that money for any purpose they desire, including buying a second home or an investment property. Using a home equity loan to buy another house is not without risks, however, so it’s smart to understand the pros and cons before proceeding.
Here are a few things to consider:
Pros
- You’ll reserve your cash flow. Using home equity to buy a second home keeps cash in your pocket that you would otherwise use for the home purchase. This increased cash flow can result in a healthier emergency fund or go towards other investments.
- You’ll increase your borrowing power. Buying a house with equity will allow you to make a larger down payment or even cover the entire cost — making you the equivalent of a cash buyer.
Cons
- You’ll put your primary residence at risk. Using a home equity loan to buy a new house can jeopardize your primary home if you’re unable to handle the payments.
- You’ll have multiple loan payments. Taking equity out of your home to buy another house means you’ll potentially have three loans if you have a mortgage on both your primary residence and the second home in addition to the home equity loan.
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