Can I Refinance My Home to Buy Another Home?

Using the equity in an existing home to finance the purchase of another property is a common strategy. This approach allows homeowners to convert a portion of their home’s value into liquid funds, which can then be used for a down payment or even the full purchase of an additional property.

Leveraging Home Equity for a New Home Purchase

Home equity represents the portion of a home’s value that a homeowner truly owns. It is the difference between the property’s current market value and the outstanding balance of any loans secured by the home. Equity increases as mortgage principal is paid down and as the property’s market value appreciates over time.

Refinancing offers a mechanism to “cash out” this equity, transforming it into usable funds. This process involves obtaining a new loan that is larger than the existing mortgage, with the difference provided to the homeowner in cash.

The cash from a refinance can then be applied toward a new property, covering a down payment on a second home, an investment property, or even the entire purchase price if sufficient equity is available.

Refinancing Products for New Home Acquisition

Several refinancing products can provide access to home equity for purchasing another property. A cash-out refinance is a common method, where the existing mortgage is replaced with a larger one. The difference between the new, larger loan amount and the payoff of the old mortgage is given to the borrower as a lump sum.

Lenders set limits on how much equity can be accessed through a cash-out refinance, expressed as a loan-to-value (LTV) ratio. For conventional and FHA loans, the maximum LTV is commonly 80%. Eligible military homeowners with VA loans may access higher LTVs, sometimes up to 90% or 100% of their home’s value, depending on the lender.

Another option is a Home Equity Line of Credit (HELOC), which functions as a revolving line of credit secured by the home’s equity. This allows flexible access to funds up to an approved limit, where borrowers can draw money as needed during a specific draw period. Interest rates on HELOCs are often variable, adjusting with market conditions.

A Home Equity Loan (HEL) provides a lump sum of money, but it operates as a second mortgage rather than replacing the primary mortgage. The borrower receives the funds upfront and repays the loan with fixed monthly payments over a set term. HELs typically come with fixed interest rates and terms ranging from five to 30 years.

Financial Qualifications and Impact

Qualifying for a refinance to fund a new home purchase involves meeting specific financial criteria. Lenders assess a borrower’s creditworthiness, including their credit score. A score of 620 or higher is generally expected for conventional cash-out refinances. FHA cash-out refinances may accept scores as low as 500-580, and some VA lenders may approve scores around 550.

Another factor is the debt-to-income (DTI) ratio, which compares monthly debt payments to gross monthly income. Lenders use DTI to evaluate a borrower’s ability to manage additional debt. This ratio is calculated by adding all monthly debt obligations, including the projected new mortgage payment, and dividing that sum by the gross monthly income.

While lenders prefer a DTI ratio of 36% or less, many approve loans with DTI ratios up to 43%, and sometimes up to 50% for cash-out refinances. Lenders also verify income stability and employment history, often requiring two years of W-2s, pay stubs, and tax returns.

The loan-to-value (LTV) ratio is also crucial, as it determines how much equity can be accessed. Lenders require an appraisal to establish the home’s current market value. Taking on a larger loan through a refinance will increase monthly mortgage payments and overall interest paid. Borrowers should anticipate closing costs, typically ranging from 2% to 6% of the new loan amount, including fees for origination, appraisal, and title services.

Coordinating the Refinance and New Home Purchase

Orchestrating a refinance and a new home purchase requires careful timing and coordination. It is advisable to complete the refinance on the existing home first to secure the funds, ensuring the cash is liquid and available for the new home’s down payment or full purchase.

The application process for the refinance involves submitting documentation, including tax returns, bank statements, and current mortgage information. An appraisal of the current home will be conducted to determine its value. The refinance loan then undergoes an underwriting process, where the lender reviews financial details to ensure eligibility and affordability.

Upon approval, the refinance loan closes, and the new mortgage replaces the old one. The cash-out portion is typically disbursed as a lump sum, often via wire transfer or check. These funds can then be applied to the purchase of the new home, whether for a down payment or to buy the property outright.

Working with experienced professionals, such as mortgage lenders, real estate agents, and financial advisors, is beneficial. These professionals provide guidance on timing and navigate the intricacies of both transactions, helping ensure a smooth transition from accessing equity to acquiring a new property.