How to buy land using home equity

Given the current shortage of housing inventory, many would-be homeowners are thinking harder about buying land and building a house on it. Unfortunately, purchasing a parcel for new construction isn’t as straightforward as purchasing an existing home, especially when it comes to financing: A regular mortgage is out. Happily, there are loans that can help cover the cost of a land purchase, including a home equity loan.

Let’s talk about how to buy land using home equity.

Using a home equity loan to buy land

While there are specialized borrowing vehicles for purchasing real property and building on it (more on them below), they’re often geared to commercial developers. With a home equity loan, you’re on more familiar ground, so to speak. When you take out a home equity loan, aka a second mortgage, you’re borrowing money against the equity you’ve built up in your current home. That means that your home is collateral for the loan. If you don’t repay it, you could lose your home to foreclosure — a risk not to take lightly.

You can use the funds from a home equity loan for any purpose: buying the land, hiring an architect, engaging a general contractor and more. Depending on the loan term, you might have as much as 30 years to repay it with interest, similar to a 30-year mortgage for a home purchase.

Similarly, you may be able to use a home equity line of credit (HELOC). Using a HELOC to buy land also means borrowing against the equity in your house, but instead of a lump sum, you get a revolving line of credit — one that refreshes as you pay back what you borrow. This could allow you to borrow to buy the land, repay that sum, then borrow again to fund construction, for example. You could even buy the land with cash, wait until you accrue enough equity in your home, and then use that to establish a HELOC to develop the property.

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If you want a lump sum to work with, though, skip the line of credit options and pursue the home equity loan to buy land.

Pros and cons of using home equity to buy land

Pros Cons A home equity loan has a fixed interest rate, so you’ll be able to budget for predictable monthly payments. Home equity loans provide only a set amount of funds, so if you end up needing more money for the purchase or due to delays and extra expenses you’ll have to find a supplemental source of financing. It might be easier to qualify for a home equity loan compared to other financing options. If you can’t repay the home equity loan, you could lose your current home. A home equity loan might offer better terms and interest rates than other loans, along with tax advantages (depending on exact use). Land doesn’t always increase in value, which presents more risk for you as the borrower and your lender.

What to consider before buying land with home equity

Before using home equity for buying land, consider what you’ll use the land for. Most land buyers use the property for residential purposes. In fact, in 2021, residential land sales represented 59 percent of all land sales, according to a report by the National Association of Realtors and Realtors Land Institute.

If that’s the case with you, consider whether a home equity loan is the best form of financing to make that happen. Those looking to build a home are likely looking for developed or improved land that’s already connected to main utilities and roads. Developed land is generally more costly than raw land. But the upper limit you can borrow with a home equity loan is typically 85 percent of your equity (sometimes just 80 percent). It might not be enough, in other words.

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As noted by the U.S. Bureau of Economic Analysis, land values vary drastically across the U.S. depending on location (for example, rural versus urban), proximity to facilities, local market conditions and other factors. There are also many other expenses beyond the price tag of the land, including a land survey and title search, in addition to the costs to build a home once you’ve purchased the land it’ll sit on. All of these can be paid for with a home equity loan, but you’d need substantial equity to cover everything involved in the land purchase and construction.

Is land a good investment?

It can be — but it really depends how you use it. Buying land for farming or commercial development is a whole separate conversation, so let’s focus on residential use here.

If you’re buying the parcel next to your current home, that added space can help you sell your property for more down the road. You might also qualify for a tax deduction on the home equity loan interest, especially if you use the land to enlarge your home or add new structures/facilities —things that arguably improve the property value.

But if you buy a parcel way out in the middle of nowhere that isn’t hooked up to utilities, you’ll need to spend quite a bit of money before that land is usable. The more you have to spend, the more it eats into your return-on-investment down the road.

Ultimately, this is a decision you should weigh carefully. Don’t act on it unless you have a clear use case for the land — especially if you’ll be using a home equity loan to buy land, which means putting your current residence on the line.

Can you purchase land using a conventional mortgage?

No — a mortgage has to be secured by an existing residential property on the land. That’s why, when they want to buy land without a home on it, people have to explore other lending options.

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Alternative land financing options

A home equity loan isn’t the only option for buying land. Consider these alternatives:

Construction loans

Construction loans are short-term loans meant for those building a new home. The loan can be used for various project-related expenses, including land, permits, materials and labor. Typically, you draw down funds from the loan as needed as the project moves along and meets certain milestones, then convert it to a permanent loan and repay it in a similar way to a traditional mortgage. To qualify, you’ll need to provide the construction loan lender with a project plan that includes your budget and timeline, in addition to making a significant down payment or having other assets in the bank.

Some people buy land and wait to build equity in it. Once they have enough, they use the equity in land for construction loan collateral.

Land loans

As their name implies, land loans help borrowers buy raw or undeveloped lots or parcels. But they aren’t as common as construction loans. Depending on how the loan is structured, you might need a hefty down payment (more than 20 percent) and to contend with a shorter repayment period. In some cases, you might need to put up home equity as collateral, or demonstrate that the property meets the appropriate zoning and land-use requirements.

Personal loans

Personal loans max out at a lower dollar amount than home, construction and land loans, but if you have your eye on an affordable parcel, this could be an option.

With a personal loan, you can use the loan proceeds however you want — including to buy land.

Bottom line on using home equity to buy land

Borrowing money to buy land comes with risks, especially if you’re putting your home on the line with a home equity loan. Begin by comparing home equity loan rates and explore whether cash or a construction, land or personal loan might be a better fit.

Additional reporting by Kacie Goff