Courtesy of Joshua Rodriguez/ MoneyWatch CBSNews
Owning a home has its perks, and one significant advantage of homeownership is the equity you build over time. In fact, right now, the average homeowners has nearly $200,000 worth of tappable equity that can be borrowed against, typically at a competitive interest rate.
So, what can you do with $200,000 in home equity at your fingertips? For some, the answer is to buy another house.
Since the proceeds of home equity loans can be spend on , nothing is stopping you from using yours to purchase another home. And, there are multiple instances in which doing so may be a wise idea.
3 reasons to use your home equity to buy another home
A home equity loan or home equity line of credit (HELOC) could allow you to borrow a substantial amount of money when you need to. Here are three reasons why it may be a good idea to use that money to buy another home:
You have lots of equity but limited cash
When you purchase a new home with a mortgage, a 20% down payment lets you avoid paying for private mortgage insurance (PMI). If you're purchasing a $200,000 home, a 20% down payment equates to $40,000.
But if you have limited cash on hand, you may face challenges with purchasing a new home as a vacation or investment property. Or, you could be on the hook for extra costs, like PMI, related to the new home.
A home equity loan could help. For starters, you typically don't have to make a down payment to tap into your equity. And, you may be able to wrap your home equity loan closing costs into the loan itself to avoid paying out of pocket for the loan costs.
You want to create a passive income stream
If you want to generate passive income, using your home equity to purchase another house could be the key to doing so. After all, you can use your new home to generate passive income with:
A long-term rental: You can purchase the new home to use as a long-term rental. This can be done on your own or by enlisting the help of a property management company.
A short-term rental: You can also list the new home as a short-term rental on websites like Airbnb and VRBO, provided that you're following all the local regulations and requirements for doing so. While the income from a short-term rental may not be as consistent as a long-term rental, you may be able to charge more per day when you rent your home out on a short-term basis.
You want a vacation home
Your home equity can also help you buy the vacation home you've been dreaming about. Maybe you want a home by the lake to escape city life or want to purchase a small loft in the city to visit during the holidays. Or, maybe you want a second home that's closer to your grown children or family members but you aren't interested in relocating. While purchasing a new home can require a significant amount of cash, you could use your home equity to help cover those costs.
The bottom line
If you want to purchase a second home, a vacation property or an investment property, you may want to find out how much home equity you have available. Right now, the average homeowner has a lot of home equity they can tap into — and one big benefit of these loans is that they usually come with competitive interest rates. As such, a home equity loan could be a viable option for financing your next real estate purchase.