When planning to buy a second home, you often need to find additional ways to fund your purchase. This is where using your home equity can come in handy. But how do you do that? This simple guide will help you on tapping this resource.
What is home equity
For those who might not be familiar with the term, home equity is your share in the total value of your home, or your actual stake in the property. For instance, if you used your own money to pay the 20% down payment for your current home, then get a loan to complete the payment. Your home equity will be the 20% down. When you pay off your loan, the amount you pay is carried over to your home equity, making it grow.
Home equity can be used for a variety of purposes. For instance, if you are doing major repairs on your house, you can use it to cover the cost. It is also normal for people to use their home equity as a means to finance their children’s education. In fact, it can even be used to finance the purchase of a second house.
Why use it
One of the biggest reasons why you might want to tap into your home equity is because it serves as an easy source of funds. Think of it as a sort of savings account you can use anytime you need. Provincial Bank explains that lenders actually give more favorable terms to people who use their home equity in Lakeville for a second mortgage.
However, keep in mind that there are you also have to deal with certain risks. With your home equity being used, you increase the risk of your first home being foreclosed. In addition, you are tying your finances to only one type of asset, which may reflect badly on your financial history.
How to use your equity effectively
When tapping into your home equity, you should carefully choose how to use it to fund your purchase. For instance, you might be attracted to going for home equity loans because of low rates. However, you should remember that these rates would eventually go up.
Also, remember only to tap into your home equity as a last resort. If you can find a better means of financing your new mortgage, stick to it instead. However, when out of options, you may give it a go.