Are you interested in purchasing a vacation home but you're not sure how to do it? Well, the money you’ve already put into your current home might just come in handy here. This can be accomplished by taking out a home equity loan or a home equity line of credit (also known as a HELOC) or taking advantage of a cash-out refinance. Read on to find out more about how to use the equity in your home to make your vacation dreams a reality.

What is home equity?

Home equity is the difference between what your home is worth and what you still owe on the mortgage. The average homebuyer utilizes a loan to purchase a house. Over time, as you make mortgage payments, you build up equity. Doing a little quick math and subtracting what you owe from your home’s value will give you a good idea of how much equity you have in your home—and how much you have to spend on a vacation home. But how do you access that equity?

How do you use the equity in your home for a second home?

To start, you should have a plan for how to use your home’s equity before speaking with a lender. This is, of course, a wise thing to do when taking any financial step. But it could also be necessary to get approved for the loan.

Before you apply, you need to consider the three options for receiving the equity you’ll use for a vacation home: a home equity loan, HELOC or cash-out refinance. While all are good options for affording a second home, it’s important to understand their differences and how one might fill your needs better than another. That way, you’ll know for sure which one is right for you.

What’s the difference between a home equity loan, a HELOC and a cash-out refinance?

Essentially, a home equity loan comes as a lump sum with a fixed interest rate. You then pay it back in a series of installments over a certain period. On the other hand, funds from a HELOC can be accessed in smaller amounts over time and repaid as you go or after the draw period ends. In this way, a HELOC acts in a similar way to a credit card.

The major difference is that a HELOC provides more flexibility than a lump sum loan. With this option, you take out the money as you need it, rather than receive it at once. However, the fees for HELOCs can be higher, and they also have variable interest rates.

With a cash-out refinance, you replace your current loan with one that is larger. The difference is then paid to you in cash and can be used to make the down payment on or even pay for your vacation home. Like home equity loans, this option is a lump sum payment that comes with fixed interest rates.

Because you’re refinancing your home, a cash-out refinance can mean a more involved application process. But at Solarity Credit Union, we make it as easy as can be. Interested in learning more? Speak with one of our Home Loan Guides.

With all of these options, an intriguing benefit is that the interest may turn out to be tax-deductible.

What are some advantages of using your equity for your second home?

While it may not be the first method that comes to mind, using equity is a smart way to pay for a second home. Here are just a few of the many benefits:

  • One of the main reasons using home equity is a great way to pay for a second home is the minimal risk. Using the equity you’ve built is more stable than most of the other loan options out there. Any method of borrowing money comes with its risks. But with equity, these are less likely and less severe.

  • Having access to a large sum of money is very helpful when navigating the housing market. This means you can put a pretty large down payment on your future vacation home. Your larger offer could be the difference between getting rejected or getting approved for a second home.

  • By using your equity, you can hold on to the funds you’ve saved over the years. When you don’t need to dip into those accounts for purchasing a second home, it stays available for other uses.

  • By changing the terms of your home loan, a cash-out refinance can reduce your monthly mortgage payments. This makes it even easier to afford the vacation home of your dreams.

  • Home equity borrowing comes with lower interest rates than other options, such as personal loans. And a cash-out refinance or home equity loan, the interest rates are fixed, meaning they will stay the same from month to month. This predictability makes it easier for you to plan for the future.

  • Buying a second home, and using equity to do so, diversifies your portfolio of assets. It can really pay off for a successful real estate future.

Is using equity for a vacation home the best option?

Now that you know how to use the equity in your home, should you take advantage of it? While the rewards of using equity to buy a second home outweigh the risks, whether or not it’s the best option for you will depend on your specific situation. How much equity do you have? Is your income steady? How much will the down payment on a second home cost you?

You’ll also have to determine just how you’ll access your home’s equity. Is a home equity loan or line of credit or cash-out refinance right for you?

If you have questions or concerns about how to use the equity in your home, contact a Home Loan Guide at Solarity Credit Union to discuss your plans for the future. Consider taking out a HELOC or utilizing a cash-out refinance with Solarity. We can’t wait to help you make your vacation home a reality.

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