Use equity to buy another home?
If you want use equity to buy another home, you’ll need to calculate your down payment. This means figuring out how much cash you have saved up and subtracting that from the amount you owe on your current property.
Buying a second house is something most people dream about doing. But when you actually need to take out a mortgage to finance the purchase, things can become a little tricky.
For example, you might not qualify for a mortgage loan because you don’t have enough equity in your existing home. Or maybe you don’t have enough savings to cover the entire cost of buying a new place.
You can get around these problems by using equity instead of cash. Equity refers to the difference between the value of your current home and the total amount you owe on it. In other words, it’s the amount left over after you’ve subtracted the costs associated with owning a home (such as interest payments) from its worth.
In fact, the process of buying a second property can often feel like a minefield. There are so many things to consider, such as whether you should rent out the first property, what kind of loan you should apply for, and how much equity you should set aside before applying for a mortgage.
But don’t worry – we’re here to help! In this article, we’ll explain everything you need to know about using equity to buy a second property.
How Much Equity Do I Need To Buy Another Home?
The first thing you need to decide is how much equity you have in your current property. This is known as “equity”, and it’s basically the difference between the value of your home and any outstanding debts against it.
For example, let’s say you bought your home for £100,000, and you owe £50,000 on the mortgage. The total value of your home would therefore be £150,000. However, if you had no debt against your home, it would be worth £200,000. That means you’d have £50,000 of equity in your home.
So how much equity do you need to borrow? Well, it depends on two factors. First, you need enough equity to cover the cost of the new property. Second, you need enough equity left over to repay the existing mortgage.
Let’s look at these separately.
Cost of the Property
If you plan to spend around $600,000 on your new property, you’ll need to save around $300,000 in order to afford the deposit. Let’s assume you’ve saved $100,000 already, which leaves you with $200,000 of savings.
That means you’ll need to come up with $400,000 of equity in order to buy the property. Of course, you won’t actually need to give away $400,000, but rather just enough to cover the remaining costs. For example, if you were planning to borrow $800,000, you’d need to save around $400,000 in order to meet the requirements.
Mortgage Repayment
If you have an $800,000 Mortgage.
A 30 year mortgage should cost you $2,892 per month at 1.84%, with $241,608 in total interest.
A 30 year mortgage should cost you $3,086 per month at 2.32%, with $311,178 in total interest.
It may vary from bank to bank. To know complete details for this better chat with a mortgage broker. Or you can talk to your bank.
Equity vs Loan Amount
Now that you understand how much equity you need to borrow, you can calculate how much you need to save.
How does equity borrowing work?
The first thing you should understand is that equity borrowing works differently than regular mortgage lending. When you take out a traditional mortgage loan, you’re essentially giving the bank a lien against your home. The bank owns the title until you repay the entire balance of the loan.
With equity borrowing, however, you don’t give the lender any ownership rights. Instead, you pledge your home’s equity (the difference between its value and the outstanding debt) as collateral for a new loan. As long as you keep paying off the original loan, the bank won’t care whether you ever actually sell the house.
This means that you can use equity borrowing to buy a second home, a vacation rental, or even a boat!
What Is Equity Borrowing?
When you apply for a traditional mortgage, you’re usually required to provide proof of income and assets such as a credit report. By contrast, lenders typically don’t ask for these documents when you apply for equity borrowing.
Instead, they rely on the fact that you’ve already built up enough equity in your home to justify taking on additional debt.
If you decide to go ahead with equity borrowing, you’ll probably be offered several different options. For example, you might be given the choice of getting a fixed rate loan or a variable rate loan.
Fixed Rate Loan:
A fixed-rate loan offers you a set payment every month regardless of how much your home’s value changes. Fixed rates tend to be lower than variable rates because they protect you from rising interest rates.
Variable Rate Loan:
On the other hand, a variable rate loan allows you to adjust your monthly payments based on fluctuations in the market. Variable rates tend to be higher than fixed rates because they expose you to potential increases in interest rates.
Both types of loans come with their pros and cons. A fixed-rate loan gives you protection against rising interest rates, but it can mean paying more each year. On the other hand, a flexible loan lets you lock in a low rate now, but it exposes you to potentially high rates later.
It’s important to remember that both types of loans carry risks. For instance, if you default on your loan, the bank has the right to repossess your home.
In conclusion:
Buying a second property can be a tricky process, but using equity can help you navigate the minefield. To determine how much equity you need to buy another home, you need to take into account the cost of the property and the repayment of the existing mortgage.
Equity borrowing works differently than regular mortgage lending and it allows you to pledge your home’s equity as collateral for a new loan without giving the lender any ownership rights.
However, it’s important to note that equity borrowing and home equity loans are different and you should consult a mortgage broker or talk to your bank to understand the details before making a decision.
The first step toward buying a house is finding a mortgage broker who will help you with the loan process.
Disclaimer: The information included on this site is for educational purposes only. Because of unique individual needs, the reader should consult their financial analyst to determine the appropriateness of the information for the reader’s situation.