Using the equity in your home to buy land: Here's how it works

Buying land is a big goal, and if you already own a home, you could be closer to it than you think.

A home equity loan to buy land could help you convert your home equity into funds for the land you want to build on, enjoy, or hold as an investment. Instead of taking out a separate land loan, you borrow against the equity in your current home to finance the purchase.

Learn how the process works, how home equity financing compares with a land loan, what lenders typically look for, the factors that affect your rate and loan terms, and the risks to consider before you borrow.

Can you use a home equity loan to buy land?

Yes, you could borrow against the equity in your home and use the funds to buy land. You have a few potential ways to do this, including a home equity loan and a home equity line of credit (HELOC).

The big difference is how you get the money. With a home equity loan, you receive the money as a one-time lump sum. A HELOC is similar to a reusable home equity loan. You can borrow, repay, and borrow again up to your credit limit, over and over, during the draw period.

Because you’re borrowing against the equity in your home, your home secures the loan, not the land you purchase. That's a key difference from a land loan, and it’s central to how a home equity loan for land purchase works.

If you decide to go with a HELOC, most HELOCs have variable interest rates. Achieve Loans offers a fixed-rate HELOC, which could provide more predictable monthly payments.

Home equity loan vs. land loan for buying land

A land loan is secured by the land you’re buying. Because vacant land is generally considered riskier collateral than property with a dwelling, land loans often have higher interest rates, larger down payment requirements, and stricter qualification standards than traditional mortgages. 

The exact requirements may vary depending on what type of land you want to buy. For example, many lenders may require at least a 35% down payment for raw land, but may accept a smaller down payment for developed land.

A home equity loan for land doesn’t use the land itself as collateral. Instead, the loan is secured by your existing home. Because lenders typically treat an established home as stronger collateral, a home equity loan could have a lower interest rate and easier qualification requirements.

The better option depends on your financial situation, how much equity you have, and your goals for the land.

A standard purchase mortgage is the loan you use to buy your home. It's secured by the home you purchased, like a land loan is secured by the land you use it to purchase. If you still have a purchase mortgage and take out a home equity loan on your home to buy land, that home equity loan is a second mortgage behind your purchase or primary mortgage.

What lenders require to qualify

When you apply for a home equity loan or HELOC, lenders check how much equity you've built in your home, often requiring you to keep at least 15% to 20% equity after borrowing. They'll also review your:

• Combined loan-to-value (CLTV) ratio: The total debt secured by your home divided by its current market value.

• Credit score: This offers lenders a snapshot of your credit history so they can gauge how well you've repaid debt in the past.

• Debt-to-income (DTI) ratio: Your combined monthly debt payments divided by your gross (pre-tax) monthly income.

With a home equity loan, your home secures the loan, so the land you plan to buy generally doesn't affect these core qualification factors. However, some lenders may take how you plan to use the funds into account.

How much you can borrow depends largely on your available equity and your lender's maximum CLTV ratio. Your credit score and DTI also play a role. Our guide to home equity loan requirements explains what lenders typically require and could help you get an idea of your borrowing power.

Rates, terms, and what affects them

Your rate on a home equity loan to buy land depends on several factors, including your credit, CLTV ratio, DTI ratio, and loan amount. A stronger credit profile and more equity generally help keep your rate low.

Keep in mind that the lowest advertised rates often reflect a narrowly defined, low-risk borrower: a high credit score, a low CLTV ratio, and high income. Most applicants don't qualify for advertised rates.

Most HELOCs carry a variable interest rate that could change over time. Achieve Loans offers a fixed interest rate. Some lenders have hybrid loans with a variable rate that you can lock in for certain purchases.

Terms for home equity loans generally range from five to 30 years, and you start repaying the interest and principal right away. HELOCs, on the other hand, have two phases:

• Draw period: This normally lasts five to 10 years and is when you can borrow, repay, and borrow again up to your limit. 

• Repayment period: The second phase of a HELOC is the repayment period, normally 10 to 20 years. During the repayment period, you can’t make any more withdrawals from your HELOC.

The terms you get for your home equity loan or HELOC will depend on your lender and what you choose. Longer terms tend to have lower monthly payments but cost more in interest overall.

Risks of using home equity to buy land

The key factor to consider when using home equity to buy land is that your home serves as collateral when you borrow against your home equity. If you don't repay the loan, you could lose your home.

Vacant land usually doesn't produce income and could take longer to sell than a house, so the loan payment will likely come out of your existing budget rather than from the land itself. That trade-off sits at the heart of whether you decide to use home equity to buy land.