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What Is a Land Equity Loan?

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Land equity is the value of your land minus the balance of your land loan. If you’ve built up equity, you may want to tap into it to build a home on the land or for other purposes like paying down high-interest debt or unexpected bills. Learn more about obtaining an equity loan on land.

What is a land equity loan?

A land equity loan is when you borrow against the equity in land that 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.

Although it may sound similar to a home equity loan, you obtain a land equity loan for property that doesn’t have permanent structures built on it. Also, lenders tend to require lower loan-to-value (LTV) ratios, shorter repayment terms and charge higher rates for land equity loans.

Pros and cons of a land equity loan

Pros

 Typically has a fixed payment schedule

 Can use the funds for any purpose

 Has a longer repayment period than a personal loan

Cons

 Uses the land as collateral

 May require a significant amount of equity

 Harder to find lenders that offer a second loan against 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. Here are 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, such as 40%, 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 80% to 90%.
  • 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, and they vary significantly by lender. You may find a lender that offers up to 20 years, but 10 to 12 years is more 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 that offer land equity loans. 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.

Land equity loans vs. home equity loans

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

Land equity loans Home equity loans
Collateral type Vacant land Home and land
Loan terms Up to 20 years Up to 30 years
Equity needed 80% to 90% LTV or less 85% LTV or less
Types of lenders offering loans Credit unions and niche lenders National 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 it and you’re confident you can keep up with the additional loan payment, it could make sense to pull out cash for a goal that improves your financial position like paying down high-interest debt.

If you’re planning to build on the land, it’s best not to take out a land equity loan. You could finance the down payment for a construction loan with your equity. But, that isn’t possible if you tie up your equity in a land equity loan; 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.

Overall, a land equity loan may be best for those who have significant equity in their land and no plans to build on the land any time soon.

 

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