If you’re a homeowner in Sacramento, chances are, you are equity-rich, and according to a 2021 study, nearly 50% of Sacramento homeowners are. With the typical home value hovering a little more than $480,000, you may have more than enough in your nest egg to purchase an investment property and begin generating income from collecting rent. But, how exactly do you use your equity to buy another home? In this article, we walk you through three types of ways to use equity to purchase a second home or as a down payment.

1. GET A HOME EQUITY LOAN

A home equity loan is a type of second mortgage that allows you to access the equity you’ve built in your home. Home equity is the difference between what your home is worth and what you owe your lender – also known as the amount of your home that you actually own. You will receive the money with a lump sum payment that is then paid back to the lender in fixed installments over time.

PROS:

• It can make buying a second property less expensive and give more liquidity to the buyer.
• You can put down a larger down payment on your second home, get rid of private mortgage insurance, and potentially lower your monthly payments and interest rates.
• Interest rates on a home equity loan are typically lower than rates on a hard money or personal loan.

CONS:

• You are essentially turning assets into debt because you are taking the part of your home that you own and tying it up in another loan.
• If either home’s value lessens, you may end up owing more on your mortgage and home equity loans, which can spread some homeowners too thin.

Interest payments on your home equity loan will not be tax deductible if used for a rental property 

Photo by Ketut Subiyanto from Pexels

2. CONSIDER A HELOC OR HOME EQUITY LINE OF CREDIT

A HELOC is similar to a credit card as it is a revolving line of credit, but you will be using your home’s equity as the line of credit. A HELOC will allow you to access and utilize the equity as you choose – up to a certain limit and within a certain time frame. With a HELOC, you can use as much or as little of your equity and pay it back over a period of time.

PROS:

• HELOCs can offer more flexibility as compared to a traditional home equity loan.
• Interest rates are usually lower than credit card interest rates.
• A HELOC credit line is typically larger than a regular credit line as a lender will loan you up to 90% of your equity in a HELOC.
• HELOCs usually don’t incur closing costs.

CONS:

• HELOCs usually have higher closing costs and variable interest rates, which may mean paying more over time.

3. WORK WITH A REPUTABLE LENDER TO GET A CASH-OUT REFINANCE

A Cash-out refinance is a type of mortgage refinancing that allows you to take on a larger mortgage in exchange for your home’s equity. Unlike a second mortgage, a cash-out refinance doesn’t add to your monthly payment, but rather the length of the loan. Once you pay off your old mortgage, you simply begin to pay off your new one.

The process of a cash-out refinance is much like the process you went through for your primary mortgage. You choose a lender, apply, provide documentation and if you get approved, all there is left to do is wait for your check! Since rates are still considerably low, a cash-out refinance may be a good option to look into.

PROS:

• Usually no additional monthly payment, making it more affordable than a HELOC
• Will be given as a large, lump sum
• You will have a single mortgage, not two

CONS:

• Interest rates on cash-out refinances are typically higher than standard refinances, but still lower than hard money or personal loans
• Similar to taking out a mortgage loan or refinancing, there will be closing costs

We encourage you to get in contact with our preferred lenders for more information and they will help you determine which use of your home’s equity is better for your situation.