By Maura Stevens

Purchasing a home is likely the largest financial transaction most people will experience in their lifetime.  Needless to say – it can be daunting.  However, once you take the leap and purchase a home you have the set the stage to benefit from home equity.  Home equity—the difference between your home’s current market value and the remaining balance on your mortgage—can be a powerful tool when it’s time to move. Whether you’re upsizing, downsizing, or relocating, using your existing equity to purchase a new home can offer financial flexibility and strategic advantages. But as with any financial decision, it requires careful planning.

What Is Home Equity?

Home equity grows over time as you pay down your mortgage and as your property’s value increases. For example, if your home is worth $400,000 and you owe $250,000 on your mortgage, you have $150,000 in equity.

This equity can be accessed in several ways—most commonly through a home equity loan, a home equity line of credit (HELOC), or cash-out refinancing.

Why Use Home Equity to Buy a New Home?
Here are some common reasons homeowners tap into their equity when purchasing a new property:

1. Making a Larger Down Payment
Using equity as a down payment on your next home can reduce your monthly mortgage payments, lower your loan-to-value ratio, and potentially eliminate the need for private mortgage insurance (PMI).

2. Bridge Financing
If you plan to buy before selling your current home, a bridge loan or HELOC allows you to borrow against your equity temporarily until your first home sells.

3. Cash Buyer Advantage
By leveraging your home equity, you may be able to present a more competitive, cash-backed offer in a hot real estate market, giving you an edge over other buyers.

Ways to Tap Into Your Equity

1. Home Equity Line of Credit (HELOC)
This revolving line of credit allows you to borrow as needed, up to a certain limit. It’s ideal for flexible borrowing but often comes with variable interest rates.

2. Home Equity Loan
This is a lump sum loan with a fixed interest rate, repaid over a set term. It’s best for those who know exactly how much they need.

3. Cash-Out Refinance
This replaces your current mortgage with a new one, allowing you to take out a portion of your equity in cash. It can provide a large amount of capital, but be mindful of the fees and interest.

4. Bridge Loan
Designed for buyers who haven’t yet sold their current home, this short-term financing option “bridges” the gap and lets you move forward with a new purchase.

Things to Consider

• Market Timing: If property values drop, your new home might lose value faster than your equity grows.
• Carrying Two Mortgages: Until you sell your first home, you may have to carry both loans, which could strain your budget.
• Credit Score and Debt-to-Income Ratio: Lenders will evaluate your financial health closely before approving any equity-based loan.
• Costs and Fees: Home equity products may include origination fees, closing costs, and appraisal fees.

Final Thoughts
Leveraging home equity to buy a new home can be a strategic financial move, especially in a competitive market or when you’re aiming to minimize out-of-pocket costs. However, it’s essential to weigh the risks and consult with financial and mortgage professionals. When used wisely, your home equity can be more than just a number on paper—it can be a stepping stone to your next chapter.