Can You Use Home Equity to Buy Land?

You found a piece of land that feels worth pursuing, for whatever goal you’re building toward. The next question, then, is how to pay for it.

If you’ve built equity in your current home, you might be able to use a home equity loan or home equity line of credit (HELOC) to help fund the purchase. That could be worth considering whether you’re buying land for a future home, as an investment, or for another long-term plan.

Before you decide, it helps to understand how using home equity compares with other financing options, including the costs, risks and tradeoffs that can come with each approach.

How a Home Equity Loan or HELOC Might Help You Buy Land

Qualified homeowners often reach for one of two tools when they want to put their equity to work for a land purchase. A home equity loan gives you a lump sum up front, repaid over a set term, typically with a fixed monthly payment. A home equity line of credit (HELOC) works more like a credit line, in that you draw funds as needed during a set draw period. When you repay what you’ve used during that period, you can draw again within your limit.

A cash-out refinance is a third option worth knowing about. It replaces your current mortgage with a new, larger one and gives you the difference in cash. You would then be able to use that cash toward whatever you’re financing, including land.

Unlike a home equity loan or HELOC, it changes the terms of your primary mortgage rather than adding a second loan on top of it. So, if you have a rate on your current mortgage you’d rather keep, this might not be the best option for you.

What a home equity loan and HELOC have in common is the source of the money: your existing home. Both are secured by the home you already own, not the property you’re purchasing. For both loans, generally consider factors such as your home’s value, available equity, credit, income, and other financial obligations when determining how much you may be able to borrow.

Why Financing Land Isn’t the Same as Financing a Home

A standalone land loan finances the lot on its own with the land as collateral. Because vacant land doesn’t have a structure sitting on it yet, and because it’s typically harder and slower for a lender to resell than a house if a borrower defaults, lenders that offer these loans tend to treat them as a bigger risk than a regular home mortgage.

That often means a larger down payment, a shorter repayment term, and a higher interest rate than what a borrower would see financing an existing house. Some lenders don’t offer land loans at all, and the ones that do often price them differently depending on whether the land has road access and utilities nearby or is fully undeveloped.

Using a home equity loan or HELOC to buy land, then, changes what’s backing the debt. Instead of the land serving as collateral, your current home does. Because that home already has an established value and, ideally, a track record of on-time payments behind it, lenders might be able to offer a lower rate and a longer repayment window than with a dedicated land loan.

Home Equity Loan vs. HELOC to Buy Land: Which Might Fit

A home equity loan can make sense when you already know the purchase price and want one predictable payment from the start. A HELOC can make sense when you’re buying the land now but expect more costs down the road, like a survey, permitting, site work, or eventually construction. In that case, you may want to be able to draw funds as those costs come up rather than borrowing the full amount up front.

Both loans, though, are secured by your home, so failure to pay them off can lead to issues as severe as foreclosure.

What to Look Into Before Using Home Equity to Buy Land

Before committing equity to a land purchase, think through important questions like these:

• How much equity do you have available, and how much of it are you comfortable putting toward this purchase? Home equity loans and HELOCs are generally limited to a portion of your home’s value minus what you still owe. Exact limits vary by lender.
• What do you plan to do with the land, and when? Buying to build right away is a different commitment than buying and holding a lot for a few years.
• What land-specific due diligence is needed separate from how you pay for it? Consider things like zoning and permitted use, access to utilities or roads, a survey to confirm boundaries, and, if you’re planning to build and will need a septic system, a perc test to check the soil.
• Do you have a plan for what happens if your timeline changes? Remember, your current home secures the debt whether your plans progress as you hoped they would or not.

Key Takeaways

• A home equity loan or HELOC may be used to buy land, with your current home, not the land, serving as collateral.
• Standalone land loans may be costlier and stricter in part because lenders view vacant land as a bigger risk than an existing home.
• A home equity loan provides a lump sum with fixed payments, while a HELOC provides a revolving line you can draw from during a draw period.
• Land purchases come with their own due diligence, like zoning, utility access, surveys, and, for builders, a perc test, separate from how the purchase is financed.
• Because your home secures the debt, it’s important to have a thoughtful plan for the land before committing equity to buy it.

Final Thoughts

Buying land is a unique kind of project, and how you pay for it doesn’t have to mirror how you financed your home. A home equity loan or HELOC gives current homeowners another route to consider, particularly when a standalone land loan doesn’t line up with what they’re planning to do.

How much equity you have, what the land will be used for, and what you’re comfortable putting on the line are all specific to your situation. Talking it through with a mortgage banker is a solid next step if this is something you’re considering.