Purchasing Land with a Home Equity Loan
Home equity is the difference between how much you owe on your mortgage and how much your home is worth. Likewise, a home equity loan (HELOAN) is a loan type where the borrower uses equity in their home as collateral. Home equity loans can be used for a number of reasons, including to finance a land purchase. If you plan on using a HELOAN to buy land, below are some details to keep in mind.
Pros and cons
When it comes to financing land, HELOANs can be used for just about any expense, from buying the land itself to hiring a contractor. These loan types have fixed interest rates, meaning you’ll have more predictability regarding to monthly payments. Similarly, HELOANs often provide better terms and interest rates than other loan types and are easier to qualify for. Despite this, one of the most important things to remember about HELOANs is that they use your home as collateral. If you fail to pay back the loan, your lender could foreclose on your home. If using a HELOAN to finance land, keep in mind that land does not always increase in value. Further, HELOANs only provide the borrower with a set amount of funds, so it’s crucial to know what your budget is before taking out loans.
Considerations
The most important consideration to keep in mind is whether or not land is a good investment. When purchasing land, keep in mind that developed land, or land already connected to utilities and roads, is more costly than raw land. Even so, you could end up spending more money on a raw land purchase if you plan to make it suitable for a home, which could impact your return on investment later on. Your budget for purchasing land with a HELOAN should include property taxes, maintenance costs, or other associated expenses. Also, it’s important to note that the price of developed and raw land can vary depending on where you purchase it. According to SellTheLandNow.com, the average cost for an acre of land in Florida is $34,000. In Georgia, an acre of land averages $30,000, while Alabama averages $18,000. Urban land also tends to be more expensive than rural land.
Best uses
One of the best land purchases you can make with a HELOAN is a parcel of land next to your current home. While this might not be possible for all homeowners, the added space can help increase the value of your property when you decide to sell it. You can use this extra property to add new structures or increase the size of your home. Doing so may also qualify you for a tax deduction on the home equity loan interest. If you’re not looking to purchase new land, HELOANs are also a great way to finance home improvements, emergency repairs, or other projects that will increase the value of your property. To learn more, be sure to check out our blog on home equity loans.
Alternatives
While HELOANs are a great way to purchase land, they’re not ideal for everyone. Construction loans, for example, are short-term loans that can be used to finance land, labor, permits, or other project-related expenses. With these loan types, you withdraw funds as needed. The loan is then converted to a permanent loan and paid back on a scheduled basis. Similarly, land loans can help finance raw and undeveloped parcels of land. Potential drawbacks to these loan types are that they could require large down payments or have shorter repayment requirements than other loan types. Like HELOANs, you may also be required to use your home’s equity as collateral. Personal loans are another avenue to consider, although they typically max out at lower dollar amounts than the aforementioned loan types. Personal loans are also less restrictive and can be used to purchase a lower-cost parcel of land.
Although using a HELOAN to buy land comes with risks, it can be an adequate way of purchasing the parcel you’ve been eyeing. Just be sure to plan for all associated costs, including property taxes, development costs, and others. With the current housing shortage, now is a better time than ever to consider buying a new parcel of land.
Looking to apply for a home equity loan? Gulf Winds can help you out.
Hunter Morrison
About Hunter Morrison
Hunter has freelanced for various print and radio publications across Northwest Florida, including The Bay Beacon, Navarre Press, Inweekly, Crestview News Bulletin, and WUWF. He was also the Editor in Chief of the University of West Florida’s student newspaper, The Voyager. In 2023, Hunter moved to Kenai, Alaska to take up a news reporting position with KDLL Public Radio. For fun, Hunter enjoys cross-country skiing, hiking, photography, thrifting, traveling, and looking for the best Thai food around.