How to use equity to buy a second home

“Prospective buyers may not have the cash to pay for part or all of an asset like a second home,” said Maxine Crawford, mortgage broker at Premiere Mortgage Center in Toronto. “They may have their money tied up in investments that they cannot or do not want to redeem. However, by using home equity, a buyer can use an existing asset to purchase part or all of another significant asset, such as a vacation home.”

What is equity?

Home equity is the difference between the current value of your home and the balance of your mortgage. It refers to the portion of your home’s value that you actually own.

You can calculate the equity you have in your home by subtracting your mortgage debt from the property’s current market value. For example, if your house has an estimated value of $800,000 and you have $300,000 left on your mortgage, you have $500,000 in equity. If you’ve already paid off your mortgage in full, your home equity is the current market value of the home.

How to use equity to buy a second home

To buy a second home with equity, you borrow money from a lender against the equity — meaning you use the equity as leverage or collateral. The homeowner has a number of options for doing this.

Refinance mortgage: When you refinance your mortgage, you are replacing your existing mortgage with a new one on different terms, either with your current lender or with another lender (you may have to pay a prepayment penalty if you switch lenders, unless your mortgage was up for renewal). ). Refinancing allows you to mortgage up to 80% of the value of your home. Refinancing your mortgage gives you access to the capital needed to buy a second home.

Homeowner’s Line of Credit (HELOC): A HELOC works like a traditional line of credit, except your home is used as collateral. You can access up to 65% of the value of your home. Interest rates on HELOCs are typically higher than those on mortgages. However, you only withdraw money when you need it and you only pay interest on the withdrawn amount, unlike a second or reverse mortgage.

Second Mortgage: This is when you take out an additional loan for your property. Typically, you can access up to 80% of your home’s appraised value, minus the remaining balance on your first mortgage. Second mortgages can be more difficult to obtain because if you default on your payments and your home is sold, the second mortgage lender will not receive any money until the first mortgage lender has repaid. To offset this additional risk for the second lender, interest rates on second mortgages tend to be higher than first mortgages.

Reverse Mortgage: A reverse mortgage is only available to homeowners over the age of 55 and allows you to borrow up to 55% of your home’s equity, depending on your age and the value of the property. Interest rates can be higher than a traditional mortgage, and the loan must be repaid if you move or die. You don’t have to make regular payments with a reverse mortgage, but the interest continues to accrue until the loan is repaid.