Similar to home equity, land equity is the value of your land minus any money you owe on the loan used to purchase it. With a land equity loan, you can turn that equity into cash without having to sell the land itself. You can use it to build a home on the property, pay down high-interest debt or cover unexpected medical bills.
Owning land can be a great investment. Over time, as the land appreciates in value, you build equity in it just as you would with a house. This gives you financial flexibility, including the ability to potentially get a loan against that equity.
Land equity loans allow you to access your land’s value without having to sell the property The loan is secured by the land itself,
These types of loans can provide funds for many purposes, such as:
- Building a home on the land
- Buying more land
- Paying off high-interest debt
- Funding college tuition
- Covering medical bills
- Starting a business
What is a Land Equity Loan?
A land equity loan works similarly to a home equity loan. The lender will provide a loan up to a certain percentage of the land’s appraised value with the land used as collateral.
Land equity refers to the current market value of the land minus any outstanding debts against it. For example:
- You purchased land 5 years ago for $100,000
- The land is now worth $150,000
- You owe $80,000 on your original land purchase loan
- Your land equity is $150,000 – $80,000 = $70,000
With a land equity loan, you could potentially borrow up to a certain percentage of the $70,000 equity.
Land Equity Loan Requirements
While land equity loans share similarities with home equity loans, there are some key differences in eligibility requirements:
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You must own the land free and clear – Most lenders will not provide a land equity loan if you still have an outstanding mortgage or lien on the property.
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Lower loan-to-value (LTV) ratios – Lenders tend to offer lower maximum LTVs, often capping loans at 65-85% of the land’s value. With a home equity loan, you can sometimes borrow up to 100% of the home value.
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Shorter repayment terms – Land equity loans usually have shorter repayment terms of 1-15 years. Home equity loans may have terms up to 30 years.
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Higher interest rates – Because they are riskier, land equity loans typically have higher interest rates than home equity loans.
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Requirement to purchase title insurance – Lenders generally require title insurance to protect against claims that could affect ownership rights.
As you can see, lenders view land equity loans as riskier than home equity loans, so you need to meet stricter criteria.
Types of Land Equity Loans
There are several types of financing you can get with a land equity loan:
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Cash-out refinance – You take out a new loan for more than what you owe on your existing land loan, pay off the current loan, and keep the difference in cash. This allows you to tap equity, potentially consolidate debt at a lower rate, and lower your payments.
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Land equity line of credit (LOC) – A revolving credit line where you can draw money out as needed. You only pay interest on what you actually use.
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Construction loan – Some lenders will allow you to use your land equity as a down payment for a construction loan to build on the land. This turns your equity into immediate funds to start building.
Each option has pros and cons to weigh when deciding which works best for your financial situation.
Where to Get a Land Equity Loan
Land equity loans are offered by some banks, credit unions, and online lenders. However, they can be harder to find than a typical home equity loan.
Your best options may be to go through:
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Small community banks or credit unions, especially those located in the same rural area as your land. Local institutions understand the specifics of lending in your market.
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Mortgage brokers who can shop your case to niche lenders that deal in land equity loans.
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Specialty land loan websites that match you with potential lenders.
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Peer-to-peer lending marketplaces like LendingClub.
Be sure to check reviews and compare interest rates, fees, and eligibility requirements from multiple lenders before deciding.
The Land Equity Loan Process
If you need funding and have substantial equity built up in your land, here is an overview of what’s involved in getting a land equity loan:
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Determine your credit score and land value
Check your credit report and FICO score so you know where you stand. Also get an appraisal to confirm the current market value of your land.
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Check eligibility requirements
Review loan guidelines from lenders to see if you meet the criteria, especially regarding maximum LTVs.
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Compare loan quotes
Reach out to multiple lenders to compare interest rates and costs. Assess both fees and overall APR.
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Complete loan application
Choose your lender and fill out a full loan application, including documents like bank statements, tax returns, and land records.
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Get land appraised
The lender will send out an appraiser to evaluate your land and confirm its worth.
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Receive loan approval
If approved, you’ll receive a loan offer outlining exact terms like interest rate, fees, and repayment schedule.
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Close on the loan
Review final paperwork, sign loan documents, pay fees, and the funds will be available to you soon after closing.
The entire process usually takes 2-6 weeks from application to funding.
Pros and Cons of Land Equity Loans
Land equity loans offer benefits, but also come with drawbacks to weigh:
Pros
- Access your land equity without selling the property
- Use funds for any purpose
- Potentially get better rates than high-interest debt or personal loans
- Draw funds as needed with a line of credit
- Consolidate other debts into single loan
- Build your dream home through construction financing
Cons
- Require land to be owned free and clear
- Have lower max LTVs than home equity loans
- Come with shorter repayment terms
- Have higher interest rates than traditional loans
- Require title insurance and appraisal fees
- Risk losing your land if you default
Alternatives to Tap Land Equity
If you don’t qualify for a land equity loan, here are a couple alternative options to leverage your property’s value:
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Cash-out refinance – Refinance any existing land loan into a new loan with a lower rate and withdraw equity in cash.
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Personal loan – Unsecured personal loans don’t use land as collateral. Higher rates but funds can be used for any purpose.
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Sell a portion of the land – Divide off a section of your land and sell just that portion to generate funds.
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Take on a business partner – Offer a share of ownership in exchange for cash to develop or improve the land.
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Trade land – Swap some of your acreage for full or partial ownership in another property that you can leverage.
Is a Land Equity Loan Right for You?
If you have significant equity built up in land you own free and clear, a land equity loan can provide access to this value to help your finances. But make sure you understand the stricter eligibility requirements and higher costs compared to a home equity loan or refinance.
Research multiple lenders to find the best rates and terms for your situation. And carefully consider alternatives like a cash-out refinance, personal loan, or simply selling some of your acreage.
With the right approach, tapping into your land equity can give you the necessary funding to improve the property, invest in new land, or pay off higher cost debts.
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.
Land loans are risky for lenders — especially if you’re still paying off the land — so the requirements are typically more stringent than they are for home equity loans. Lenders typically want to see lower loan-to-value (LTV) ratios and often offer shorter repayment terms. They also tend to charge higher interest rates.
If you still have an outstanding balance on the loan you used to buy the land, the land equity loan will be a second mortgage. That means that if the land goes into foreclosure, your original loan would be paid off first, and the land equity loan will be repaid with whatever’s leftover from the sale of the property.
Types of land equity loans
There are three different types of land equity loans, and each works differently:
- Land equity line of credit. Like a home equity line of credit (HELOC), this type of loan allows you to access credit on an as-needed basis and only pay interest on what you borrow.
- Land equity cash-out refinance. With a cash-out refinance, you’ll take out a new loan that’s larger than your current loan balance, pay off the original loan, then pocket the difference. 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 a house on the land, some lenders will accept your equity as part or all of a down payment on a construction loan or manufactured home loan.
Can I use my land as down payment for a construction loan?
FAQ
Is it hard to get equity loan on land?
What credit score is needed for land equity loan?
Can I borrow money with my land as collateral?
How do I borrow against property equity?
What is a land equity loan?
A land equity loan is a type of loan where the land serves as collateral. The difference between the land’s value and the amount owed on the land is referred to as equity. If you default on the loan, the lender can take the land to recoup losses. Land equity loans may be more readily available for larger land acreages.
How do I use a home equity loan to buy land?
Generally speaking, the process of using a home equity loan to buy land is fairly straightforward. You take out a loan backed by the equity you have in your property, then use that money to buy the land you’re seeking. You have two main options to do this: A home equity loan and a home equity line of credit (HELOC).
Is a home equity loan a good alternative to a land loan?
Best for: Homeowners who want to build another home or buy land for recreational purposes If you have a significant amount of equity built in your current home, a home equity loan could be a good alternative to a land loan since interest rates may be lower. Generally, you must have at least 20% equity remaining after borrowing a home equity loan.
Is it advisable to get a land equity loan?
A land equity loan could be a good option for those who: It makes sense to leverage your home equity for a goal that improves your financial position, like paying down high-interest debt — but only if you’re confident you can keep up with the additional loan payment.