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Building your next home or constructing your ideal business site has to start with the right parcel of land. However, financing that land can frequently become a difficult challenge.
Homeowners may not realize they have a powerful financial tool: buying land with home equity. This is also true for homeowners who still possess a mortgage.
Home equity can be leveraged for many purposes, including:
- Purchasing land for investment
- Building a new home
- Creating a vacation retreat
Using your home equity to buy land can be an effective solution to securing that dream home foundation.
Home equity options often have better borrowing features than other loan types, like competitive interest rates and flexible repayment terms.
In this article, we’ll explore how home equity works, how to use it to buy land, and what you need to consider before moving forward.
What is home equity?
Home equity is the difference between the current market value of your home and the amount you owe on your mortgage.
For example, if a person's home is worth $350,000 and owes $150,000, they have $200,000 in equity.
Pro tip: Use our handy Home Equity Calculator to figure out your own home equity amount.
Over time, that equity builds as you pay your mortgage or your home’s value increases.
This equity can be accessed through specific financing options:
- Home equity loan
- Home equity line of credit (HELOC)
Using home equity to buy land
Leveraging your home equity is frequently a highly effective way to buy land, something more and more homeowners are discovering.
There are two primary ways to access your equity.
Home equity loan—A lump sum solution
Think of a home equity loan as all the funds at once.
This option allows you to borrow a lump sum based on your available equity.
Like a standard loan, it's repaid over a fixed term with predictable monthly payments, making it a stable option for land purchases.
Key features:
- Fixed interest rate
- Lump-sum disbursement
- Repayment terms are generally set in the range of 5 to 2030 years
Home equity line of credit (HELOC)—Use only what you need
A HELOC, on the other hand, should be thought of as a revolving line of credit. This means you can draw funds as needed, much like a credit card.
With this option, you have more financial flexibility. This is especially useful if your building project will proceed in incremental stages.
A good example of this is how your land will likely need clearing and developing before construction can begin.
A HELOC allows you to draw only the funds needed for that specific purpose, saving you money on interest payments.
Key features:
- Variable interest rate
- Access to funds as needed during the draw period (usually 5–10 years)
- Interest-only payments during the draw period, with repayment of principal and interest after
Advantages of buying land with home equity
Using your home equity to buy land offers several benefits.
Competitive interest rates
Home equity loans and HELOCs typically have lower interest rates than the average unsecured personal loan or credit card. This makes them cost-effective for financing land purchases.
Flexible use of funds
There are few restrictions on using home equity funds, so you can apply them toward the purchase price, closing costs, or development expenses.
Streamlined process
If you already own a home with substantial equity, accessing it can be quicker and simpler than applying for a separate land loan.
No need for a new property as collateral
Using home equity eliminates the need to rely on the land as collateral, which is beneficial since land loans often have stricter requirements and higher interest rates.
Considerations before using home equity to buy land
While leveraging home equity can be a smart move, it’s important to weigh the potential risks and challenges:
- Risk to your home: Since home equity loans and HELOCs use your home as collateral, failing to repay could put your property at risk of foreclosure.
- Impact on your finances: Taking on additional debt affects your monthly budget and could limit your ability to borrow for other purposes in the future—so ensure the payments fit comfortably within your financial plan.
- Land development costs: Purchasing the land is just the first step—you’ll also have to consider the additional expenses for development, such as clearing, grading, utilities, and permits.
- Equity limitations: Lenders typically limit how much equity you can borrow, often up to 80% to 90% of your home’s value.
An example for #4: If your home is worth $300,000 and you owe $200,000, you may be able to borrow up to $80,000.
In other words, 80% of $300,000 minus the $200,000 balance.
Financing alternatives
If you prefer not to use home equity, there are alternative financing options for buying land:
- Land Loans: Designed specifically for purchasing undeveloped land, land loans provide flexible terms but may have higher interest rates than home equity loans
- Construction Loans: If you plan to build on the land immediately, a construction loan combines land purchase and building costs into one loan
Discussing your options with a knowledgeable lender can help you choose the best approach.
Why MIDFLORIDA is the right choice to help you finance land
When it comes to accessing home equity or financing land, MIDFLORIDA offers the expertise and support you need.
- Competitive rates and terms: MIDFLORIDA's competitive interest rates and flexible loan terms make it easier to leverage your home equity for land purchases.
- Personalized service: As a community-focused credit union, MIDFLORIDA provides personalized guidance to help you navigate the financing process and achieve your goals.
- Comprehensive loan options: From home equity loans and HELOCs to lot loans and construction financing, MIDFLORIDA offers a range of solutions tailored to your needs.
Find your equity solution with MIDFLORIDA
The solution to building your dream home could be all around you right now—home equity.
Apply with MIDFLORIDA today. Whether it’s a Home Equity Loan, a HELOC, or other purchasing solutions, we can find a way to secure the land you need.
