I have been considering using a home equity loan to finance a small land purchase of 10-30ish acres. This would primarily be an investment and to be used for hunting and recreational purposes. The only probable improvements might be a small hunting cabin and a gravel road if not already existing.

One thing I am curious about with a home equity loan is that I know I am using my home as collateral for the balance of the loan. What I don't know for sure is, for instance, let's say I lose my job and remain unemployed for an extended period of time and I am unable to continue making mortgage payments. If my home is foreclosed on, does the bank then have any right to confiscate or put a lien on the property I used the home equity loan to purchase?

I am thinking that if I purchase this land, which would primarily serve as hunting/recreational property, I would own this property outright regardless of whether I continue making mortgage payments? I would want to make sure that my family has some place to go, even if it is just a small hunting cabin, that we would own outright and not have to worry about being confiscated in the event of our inability to make payments. I don't anticipate this occurring, and we do have savings, but I was thinking this through also as some sort of homelessness insurance policy .

Thanks in advance for any insight.

No.  If you didn't take out the loan using the land as collateral then they don't touch it.  That doesn't mean you can breathe easily though, because a home equity line uses your home as the collateral.  If you don't make payments then you lose your home.  Also, if they do foreclose on the home and can't sell it for enough to cover all loans outstanding (and keep in mind it will be sold at a "fire sale" where it will sell well below market price) then you may be sued for the difference, which could cause you to lose other things, like savings and other property.

I did this exact thing 2 months ago.I bought 40 acres  of woods with a small cabin on it.I was pretty nervous getting a second mortgage on the house, but i am always nervous, so wtf.I was told by all of the older and wiser people i know, to do it.My house has been paid for for 7 years now, so the new payment sucks, but it will be nice to finally have mortgage interest to write off again.What you are thinking has crossed my  mind too.The bank would only loan me about 75% of my homes value, so if all else failed, the bank seizing my house should definetly cover the mortgage loan.

Ah, I didn't realize the bank could actually sue me further for their losses on my home. Does this occur frequently? Do banks as a matter of standard business practice sue borrowers who default for the losses on their foreclosed property? Is it possible to get a home equity loan that would protect me from this sort of event?

I hope this doesn't make me sound as if I am planning on defaulting on my mortgage (I'm not), but I am a very risk averse investor.

People have the quaint notion that they can just walk away from their mortgage note, tell the bank "Fuck you." and live happily everafter.

You are obligated for every penny you agreed to when you signed the note.

The bank could sell your house for $1.00 and then hound you forever for the balance of the note.

I think it is a bad idea, but I'm sure many will disagree.

What advantage would it be for the bank to sell your mortgaged house for less then its fair market value? That sounds like bad business, at least.I suppose we could worry ourselves into a stroke, but a little common sence goes a long way.
With all of the turmoil generated by the 08-09 scandals and  worthless mortgages, the banking world has become super anal, and defensive.We could not even begin to proceede until an appraisal was done on our house.Even after paying top dollar for the appraisal, by the banks own suggested appraiser, they would not use their value.We had to jump throug some major hoops,  and have a bunch of extra fees tacked onto the loan just to make it happen.
For those of you who think this is a bad idea, do you know, that not only would a non mortgage secured load cost you alot higher interest rate, you also  need between 20-30% down.For us, and i am sure most people 30% of $165,000 is not something we keep laying around.

We thought long and hard about this descision.I am 42 now, and we realized, if we dont do it now, we might as well give up on the dream.There is always going to be a risk, but if we dont risk anything we will never gain anything.

I would mostly agree. What I'm talking about isn't a big plan to screw the bank, I'm talking about minimizing financial risk to myself and my family given unforeseen circumstances.


There are many things one could do with a home equity loan. For instance renovations and improvements to the existing home thereby increasing the value. However, unless you have a home that's paid for, if for some reason we have another 2008 and one isn't able to find a job to cover their mortgage payment for an extended period of time the bank then has a right to the entire property that you borrowed for including all the upgrades and you would wind up with nothing. In theory, in this event, the bank comes out of it with an asset (although not necessarily a high level of liquidity) that is worth more than what they have in it.

One could purchase land with a seperate loan, but given the hypothetical scenario above, if neither the mortgage payment nor the land loan payment could be made, then the borrower loses both pieces of property and also winds up with nothing. In theory, in this event, the bank also comes out of it with multiple assets (again not necessarily of high liquidity) worth more than what they have remaining in it.

What I am asking about is minimizing risk to myself (obviously I am taking on some risk) so that hopefully in 10 or 15 years both pieces of property are paid for and I can part ways with the bank. However, given a worst case scenario as above, I would rather the worst case result end up with the bank owning an asset worth more than what they have in it while I still have something for myself and my family to fall back on.

Bank's manage their risk, and I'm only trying to do the same.

Thanks for your comment.

nope i absolutely agree. This is too much risk for a toy, or even for an investment.

equity loans are hard to get these days, a lot of homes are underwater, personally i wouldn't put my home at risk for a non-liquid asset

I'm a little befuddled by these responses, so I'm assuming I am not being clear about my intentions and concerns. Are you all assuming that the plan is to purchase the property with borrowing against a home's equity and then intentionally allowing the mortgage to default so that I can own the property outright? If all I wanted was a piece of land with no home I would sell my home and buy the property. I think I've made it clear that is NOT the plan since it would make no sense anyway.

My initial question is simply, if I used a home equity loan to purchase the property and unforeseen events cause a major change in my economic situation for an extended period of time and I were unable to continue making payments on my mortgage, would the bank have the ability to take the land in addition to my home?

I think based on the above responses that the answer to that question is "maybe" depending on what the home is sold for vs. how much is outstanding on the loans, though I don't see that this is any more risky given my worry about a dire change in economic circumstances.

If it were merely a choice between paying the mortgage and paying the land loan payment, then it would be far less risky to use a land loan to pay for the property. In this scenario I would not be at risk of having a lien against my home or being foreclosed on and would simply lose the land. However, in my situation, I'm not talking about a huge piece of land and the payment would be well within my budget given my income level, so I don't anticipate having to face the situation of making one payment or the other.

The only scenario I can see given my current employment status and expected future prospects is the only thing that would keep me from making the payments on both would be a total loss of employment for a long period due to circumstances outside of my control. Savings will only last for so long, and if I have no income at all, I certainly won't be making any loan payments. Given that scenario, I would rather be left with only a piece of land vs. being left with nothing at all.

Am I being any clearer?

As a real estate agent who dealt exclusively in land and farms, my advice is to save up a down payment for the land, go to the bank and take out a separate loan just for it. If you put a large enough down payment, no other collateral should be required. I've done this myself and never been required to put up anything else I own as collateral. If you lose your job and can't pay for the land and the bank ends up with it, they want to know they can sell it and get all the money they are owed by you. And as mentioned, yes it very easily could be sold at a foreclosure or fire sale and depending on the property's desirability, the economy, how well they advertise it etc the land could easily bring less than you paid for it. That's why a good down payment is essential for you and the bank.



So many people think that down payments are bad for them and good for the bank. In reality, it's good for both parties. It provides protection for both you and the bank if things go south. The idea is, the land (or home or truck or boat or whatever) is worth as much or more than the outstanding balance on the loan. If it has to be sold by the bank, the sale proceeds will cover the loan balance and you don't owe them any more money.



I can see no reason you would tie a land purchase to your home unless you can't afford a down payment, in which case, I would strongly advise you against buying the land to begin with. I completely understand your question and I know you aren't looking to default and try to screw the bank. You asked the wise "what if" question. And the answers in this thread have, for the most part, been correct. If you can no longer pay the land note, the bank foreclose, they sell it and if they come up short of what you owe them and if the house is collateral for the land, then yes, the bank can come after the house.

I think we understand your plan, but would still not mortgage the house based on the risk of not being able to pay your loan based on unforseen, uncontrollable circumstances. You could get cancer, hit by a bus and survive but be unable to work, we could have another great depression, or you could simply decide you want to move, but might not be able to sell your house without paying off the mortgage. If you do the deal the way you are discussing you keep your land and lose your house. I'ld rather have the house. Another consideration, land alone is usually way slower to sell than a house and can be a little more volatile in price.

do NOT take out a loan for play property
if the loan is not going to net you income, it is spending the equity you have EARNED in your home on something you can play on(hunting property, a new car, etc)
i would never take equity out of my home for something that does not return more than the interest rate on the refinance/2nd mortgage.

Why not just live below your means and make saving up for the land a priority to buy it with cash?  No way in hell I would even consider putting a second mortgage on my HOME to buy a piece of property that has absolutely no guarantee that the income will cover the cost of the loan.  Sounds foolish to me.

OP says is does not like risk but what he is proposing equals risk.

To answer some questions:

If you get a home equity loan you can spend the money on whatever. They don't care or even ask. If you use it to buy land the land will not directly be collateral for the loan. As mentioned however if you default on the home equity loan, or your mortgage they can sue you and take things you own. Technically they could go after anything but realistically all I have seen them go after is real estate because it is easy for them to put a judgement lien on it. How likely is it? Fairly likely in your case where you would have a piece of property that you own free and clear.

If you are that worried about it don't buy it. I own several pieces of real estate and I would not be putting my personal home on the line to buy recreational property.  

Save up and pay for it that way it is a blessing and not a curse.

I get what you all are saying. What I'll probably end up doing is just saving a little longer to pay for most of it in cash and get a small enough land loan that I can pay off within a few years for the remainder. Thanks for all of your input, I do really appreciate it.

Another thought I have had was using the property for timber whenever I do acquire it. Does anyone have experience with this? I know some people will have a company come in to clear a property and get paid for the timber and replant new tress afterwards. Does this typically net a decent percentage of the property value? I assume there are a lot of factors that would determine the payout.

The question comes down to putting your home at risk for a toy.  I would say that is unwise.   And don't think this isn't a toy, if it doesn't make you money it's a toy.  If you don't flip land often for money its a toy.   My father has a functioning farm with 400 acres, its a toy.  Yes it makes money and the land has gone up In value but that is a byproduct not the intent, which is that he likes playing with cows.

I know a tiny bit about this too.... any land with timber worth cutting will have the approximate appraised value of the timber included in the price.
Just like when you "buy a house" - look at the paperwork for your house, you didn't buy a house - you bought a certain piece of land described by a legal description (along with a municipal address) and all improvements attached (which is the house).

As Nick mentioned, the timber value will be figured into the land price unless the land is priced at a residential/commercial/recreation value. Meaning, a lot or land for a house might have $5,000 worth of timber on it  but it's not really figured in because the land is so valuable for residential use that the $5,000 for the timber value is negligible. Depending on where you are, what sort of property you buy etc, clear cutting all or part of it and planting it back is possible. However, planting (usually pine trees) isn't cheap and you are looking at a long term (20+) return on your investment. You will get the first income at around 10-14 years depending on many factors when the the first tree thinning is done. Then you are looking at another 5-10 years for the pines to mature and if pine prices are high at that time you can get a decent payday. Then you are left with the option of spending money to replant or spend a LOT more money to clean the property up and make it pasture.



Nothing wrong with the tree business but it's a long term investment and like anything else, it's never guaranteed. Also, if you want to use the property for recreation, an un-thinned pine plantation above about 3 years in age is not conducive for recreation. It will be as thick as dogs hair and you won't be able to walk down the tree rows for years. Also another thing I've seen happen is people have a beautiful stand of 20 year old pines but they don't want to cut them because it's going to look like a bomb was dropped once they are gone. So you get into a catch-22 of having all these trees you planted as an investment but you don't want to cut them because you will be left with big ugly mess until you replant and get trees growing again.



Definitely not saying it's a bad idea because it's not. It's just something to really research and think about.



 

How much equity are you talking? Small amount sounds better. If you can pay it in a safe matter finicially it is better to have deductible home interest at probably half the interest rate.... Land loans are generally twice or more single family residential rates.