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If home equity is used as a down payment on a second home, how much initial equity does the second home have? is it equal to the equity-down-payment as in a cash down payment for a home?

Say you have 15,000$ equity in home #1, and use it to finance a down payment for home #2, does home #2 have $15,000 in initial equity? and if so, can that $15,000 be used to finance a down payment on a 3rd home?

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    Will your bank actually allow you to go down to 0 equity in home #1? You're asking them to take 100% of the risk of any losses there. Ditto with home #2 if you want to but home #3
    – Robert Longson
    Apr 20, 2020 at 14:35
  • @RobertLongson It's 100% of the risk only if the bank thinks the homeowner doesn't care at all about their credit rating and has zero relocation costs, so they will default and walk away once underwater by $1. In reality, many people keep their underwater homes. So it's not 100%.
    – nanoman
    Apr 20, 2020 at 15:28
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    @nanoman if you can remember as far back as 2008
    – Robert Longson
    Apr 20, 2020 at 15:35
  • @RobertLangson Well yes, it is also true that many people do not keep their underwater homes (especially if they can no longer afford the mortgage). So there definitely is a risk to the bank on zero-equity loans. What I'm objecting to is the idea that the bank eats 100% of the losses, which could only happen if everyone defaults once underwater. The fact that some homeowners can and do continue paying on underwater homes (to save their credit rating, etc.) proves that even zero-equity homeowners take some of the risk of losses.
    – nanoman
    Apr 20, 2020 at 15:57

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It looks like you're trying to "parlay" equity to buy multiple homes. It doesn't work like that.

All "equity" is is what the house is worth (what you can sell it for) minus what you owe. The only way to use "equity" on one house to purchase another is to cash it out. That can be done by either selling the first house or by taking it out using some kind of loan.

If you sell it you'll get back what you sell the house for less what you owed on it (less any transaction costs). That could also be part of a linked transaction where you make the purchase of the second home contingent on the sale of the first.

You can also cash out equity by refinancing the first home or taking out a home equity loan. That reduces the equity on the first home by how much you take out in cash. You could then use it to make a down payment on a second home. Depending on how much equity you cash out and what your resulting loan-to-value and debt-to-income ratios are, banks may not be too keen on this approach.

Say you have 15,000$ equity in home #1, and use it to finance a down payment for home #2, does home #2 have $15,000 in initial equity?

That would mean that home #1 would then have zero equity (which the bank won't let you do) or that you've sold home #1 to cash out the equity.

if so, can that $15,000 be used to finance a down payment on a 3rd home?

Sure, but the same applies, either home #2 will have no equity or you have to sell it.

So equity can be moved from one home to another in certain circumstances, but it can't be duplicated.

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You can't finance a 2nd property using all of the equity from your first. Typically you must have at least 20% equity left after a cash-out refinance (in the US, at least). So that means if your house was worth $100,000 and you had $15,000 in equity you couldn't take any equity out to use as a down payment on another property.

In addition to the minimum equity requirement, lenders also have debt to income ratio requirements which limits the total amount of debt you can take out based on your income, and they don't count rental income in full or at all for the first couple years.

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  • 20% equity after cash-out refinance?
    – Jim
    Apr 20, 2020 at 15:21
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    @Jim Right, 20% equity leftover after the refinance.
    – Hart CO
    Apr 20, 2020 at 15:27
  • this 20% rule is governed by bank holding loan for home #1?
    – Jim
    Apr 20, 2020 at 15:34
  • @Jim yes, with the slight clarification that it's the holder of the loan after the refinance, or the holder of the home equity loan / HELOC if you go that route.
    – stannius
    Apr 23, 2020 at 20:07
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To keep owning the first house and access the equity you will need to do one of several things:

  • Get either a second mortgage with the current lender or refinance the current mortgage to pull money out of the house. The current lender generally limits the percentage of debt compared to the value of the house they will allow. The closer you are to 100% of the value of the house the more nervous they get. In the US if your loan exceeds 80% they may charge a higher rate, or they can limit how much cash you can get.

  • You can get mortgage from a new lender, they may allow you to pull cash out, but they may also limit you in a similar way as your current lender will.

  • You can get a 2nd mortgage on the first house from a different lender while keeping the original mortgage. This is harder to do. The new lender will have to agree to not having their lien in first position. They know that if there is a foreclosure they will only see money if the value of the hose exceeds the first mortgage. They may then charge a higher rate.

Since you want to use the money to buy 2nd and then a 3rd house make sure you understand all the tax and loan implications. In the US the interest on the equity pulled out of your principal residence via the remortgage or 2nd mortgage is probably not deductible. Where the mortgage on the 2nd property might be.

The new loan on the first property will be considered as part of the calculation regarding affordability of the 2nd property. Your borrowing the down payment may not gain you any thing after all the costs and risks are considered.

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