Land equity loans use the same basic structure as home equity loans. The portion of your land that you own, even if the land is still under some debt obligation, can be placed as collateral to secure a new debt. Land equity loans are different in a few ways: they are harder to source, interest rates may be lower, they can be used to build a home and they can be used to consolidate debt.
Sourcing Land Equity Loans
Unfortunately, land equity loans can be very hard to locate. Most lenders are in the mortgage business. They have standard practices for home assessments, closing procedures and lien registration. With land, however, these lenders will be slightly out of their comfort zone. They may have a harder time valuing the property. They will also have little experience foreclosing on a land debt and liquidating it to cover costs. This means their risks are higher in the case of a default, and lenders will shy away from higher risk loans.
Interest Rates on Land Equity Loans
Land equity loans often have lower interest rates, but this is primarily because of the type of borrower that uses land equity versus the type of borrower that uses home equity for collateral. The average home equity borrower is deeply indebted in a mortgage. Very few home equity borrowers own their homes outright, and it is common for them to have multiple other debts in their name. Most land equity loan borrowers, however, do not have as much debt. The average debt to purchase land is lower than the debt to purchase a home. So, landowners pay off debt faster. This means they have a lower total debt to total asset ratio, leading to lower interest rates.
Building a Home with Land Equity Loans
It makes sense a home equity loan cannot be purchased to build a primary residence. The residence itself needs to be assessed if it is intended for collateral on a loan. With a land equity loan, though, the value of the property where you plan to build can be used to secure financing for the home that will be built on it. This loan is not typically large enough to cover the whole cost of the building process. However, the land equity loan can provide financing in the short-term while you prepare for a permanent mortgage on the property.
Consolidating Debt with Land Equity Loans
Land equity loans can be used to consolidate the expenses incurred in preparing a property for development. For example, when you purchase land, you may need to take loans to pay for sewage lines, drainage improvements, leveling the property and other small items. You can consolidate these loans with one land equity loan once you are finished with the project. The single loan will be easier to manage, and it will typically have a lower total cost than each of the debts would have if maintained separately. Reducing the number of loans can be effective prior to seeking a mortgage for the new home as well.