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What Is a Land Equity Loan?

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If you own land, you have equity, which is the value of the land minus any money you may owe on the loan used to purchase it. Equity is a powerful asset because it can be turned into cash without having to sell the land. So if you want to build a home on your land, or just need to pay down high-interest debt or unexpected bills, read on to learn how to tap your equity using a land equity loan. 

What defines a land equity loan?

A land equity loan is when you borrow against the equity in land you own. The land may be raw without any improvements, or it may have some infrastructure in place like electric and water lines. Those taking out a land equity loan may own the land outright or have a land loan, which is like a mortgage for a piece of land. 

Land equity loans are similar to home equity loans, except that you’re borrowing against land that doesn’t have permanent, habitable structures built on it. Also, the requirements are typically more stringent: Lenders want lower loan-to-value (LTV) ratios, shorter repayment terms and charge higher rates for land equity loans. 

The reason is because land loans are risky for lenders, especially if you’re still paying off the land. As with a home equity loan, your land equity loan will be in a “second” position. This means if the land goes into foreclosure, your land loan would be paid first. The land equity loan would then be repaid with whatever was left over.  

Things You Should Know 

Land equity is sometimes called “lot equity,” but be careful because the term “lot” may specify a piece of land that has been improved and is ready to be built upon. 

Pros and cons of a land equity loan

ProsCons

  May be fixed- or adjustable-rate loans

  Can use the funds for any purpose

  Has a longer repayment period than a personal loan

  Uses the land as collateral

  May require a significant amount of equity

  You’ll have less buying power if the land is vacant, like a parcel in the woods with nothing on it and no utilities, as many lenders won’t lend more than 35% of the value of this type of raw or unimproved land.

How does a land equity loan work?

With a land equity loan, you’re cashing out some of your equity by putting up your land as collateral. If you default on the loan, you could lose the land to foreclosure. Here are the key aspects of land equity loans:

How much equity you need The exact amount of equity you need varies by lender. They may require a minimum amount of equity or look at your loan-to-value (LTV) ratio, which compares your loan amount to the value of your land. The maximum LTV ratio is typically between 65% to 85%, depending on the type of land and the intended use of the funds.

Key borrowing requirements Lenders will consider your credit history, debt-to-income (DTI) ratio and income.

Loan terms Land equity loans tend to have shorter loan terms, but they vary significantly by lender. Loan terms in the area of 10 to 12 years are common.

Loan amounts Some lenders may have a maximum loan amount, like $50,000. Others may not have a maximum loan amount as long as you’re at or below the maximum LTV ratio. 

Types of lenders Credit unions and smaller, niche lenders offer land equity loans. Lenders consider land loans to be risky, and land equity loans, which hold second position to your primary land loan, are even riskier. If your lender foreclosed on your land, your primary land loan would be paid first, then the land equity loan.

Types of land equity loans

There are three different types of land equity loans, and each works slightly differently.  

Land equity line of credit. Like a home equity line of credit (HELOC), but backed by land instead of a home, this type of loan allows you to access credit on an as-needed basis. 

Land equity cash-out refinance. You’ll take out a new loan large enough to pay off the original land loan and also have money leftover. You could potentially lower your payments, lock in a lower interest rate and use the extra cash to improve your land or pay off other debts.

Land equity construction loan. If you’re planning to build or place a house on the land, some lenders will take your equity in the land as part or all of a down payment on a construction or manufactured home loan.

Land equity loans vs. home equity loans

While land equity loans function similarly to home equity loans, they do differ. Here’s how they compare.

Land equity loansHome equity loans
Collateral typeLand onlyHome and land
Loan terms
  • Up to 15 years for a land equity line of credit
  • Up to 20 years through a cash-out refinance
  • Up to one year for construction loans
Up to 30 years
Equity needed65% to 85% LTV or lessUp to 100% LTV
Types of lenders offering loansCredit unions and niche lendersNational lenders

Is using land as collateral for a loan a good idea?

Whether using land as collateral for a loan is a good idea depends on your plans for the land.

If you have no plans to build on the land

It could make sense to pull out cash for a goal that improves your financial position, like paying down high-interest debt, as long as you’re confident you can keep up with the additional loan payment. However, if you don’t have a rock-solid plan for paying off the new loan and you’re replacing short-term debt (like credit card debt) with long-term debt, you may actually be digging yourself into a deeper financial hole. Using equity to pay off high-interest debt (like credit card debt) could just extend the agony and put your land at risk in the process. 

If you’re planning to build or place a home on the land

If you have real, near-term plans to build on the land, it’s probably best not to take out a land equity loan. 

You could finance the down payment for a construction loan with your equity instead, and once the construction is finished your home would be eligible for a traditional mortgage. But that isn’t possible if you tie up your equity in a land equity loan and, in that case, you may have to come up with a cash down payment for your construction loan if one is required. A land equity loan will also count against your DTI ratio, which is an important factor in qualifying for a construction loan.

If you plan to place a manufactured home on the land and use your land equity in lieu of a down payment, you may want to think carefully about your other options. Be sure to compare using a land equity loan to any available chattel loan options, which would allow you to finance only the home. 

Overall, a land equity loan may be best for those who:

  • Have significant equity in their land
  • Are certain they can afford the payments
  • Have no plans to build on the land any time soon

Frequently asked questions

Equity is typically expressed as a percentage of the value of the land, not measured per acre. To calculate how much equity you have, subtract the amount you owe on any loans secured by the land from the appraised value of the land.

Yes. When you use land equity “in lieu” (instead) of cash to make the down payment on a loan, it’s called “land in lieu” financing. This type of arrangement is typically associated with borrowers who want to finance a manufactured home or the construction of a home on land they already own. But keep in mind that if the loan goes into default, you will lose both the home and land because you’ve now tied both to the debt.

 

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