Yes, you can use a HELOC to buy another house, but it works differently than a traditional mortgage and carries different risks
A HELOC (home equity line of credit) lets you borrow against the equity you have built in your current home. You can use that money for almost any purpose, including a down payment or full purchase of another property. However, using a HELOC this way means you are borrowing against your primary residence to fund a second one — if you cannot repay the HELOC, the lender can foreclose on your first home, not just the new property.
The mechanics are straightforward: you open a HELOC, draw the funds you need, and use them however you choose. But the structure, costs, and risks differ significantly from taking out a mortgage on the new house itself. Understanding those differences matters before you commit.
Key Takeaways
- A HELOC lets you borrow against your current home's equity and use the money for a down payment or purchase, but default puts your primary residence at risk.
- HELOC interest rates are variable and can rise during the draw period or repayment period, making your monthly payment unpredictable.
- Most lenders require you to have significant equity in your first home — typically 15 to 20 percent — before opening a HELOC large enough to buy a second property.
- Using a HELOC for a second home purchase may cost more in total interest than a traditional mortgage because rates are usually higher and terms are shorter.
- A mortgage on the second property itself is often simpler and safer because it ties the debt to that specific asset rather than your primary home.
How much equity you need to borrow for a second home purchase
Lenders typically let you borrow up to 80 to 85 percent of your home's current value, minus what you still owe on your mortgage. That difference is your available equity. If your home is worth $400,000 and you owe $250,000, you have roughly $150,000 in equity. Most lenders will let you borrow 80 percent of $400,000 ($320,000) minus the $250,000 you owe, leaving you $70,000 available to borrow through a HELOC.
The amount you can actually draw depends on the lender's rules, your credit score, income, and debt-to-income ratio. A lender may approve you for a $70,000 HELOC but require you to have a debt-to-income ratio below 43 percent after adding the HELOC payment. If your other debts are already high, the amount you can draw may be much smaller than your available equity.
For a second home purchase, you will need enough equity to cover either the full purchase price or a meaningful down payment. If you are buying a $300,000 house and want to put 20 percent down ($60,000), you need at least that much available equity in your first home. If you want to buy the second house outright with HELOC funds, you need significantly more equity available.
HELOC rates and how they affect the cost of buying a second home
HELOC interest rates are variable, meaning they change over time based on the prime rate. Your rate is usually the prime rate plus a margin set by your lender — typically 1 to 3 percentage points above prime. When the Federal Reserve raises rates, your HELOC rate rises with it. When rates fall, your rate falls too.
Most HELOCs have a draw period (usually 5 to 10 years) when you can borrow money, and a repayment period (usually 10 to 20 years) when you cannot borrow anymore and must pay back what you owe. During the draw period, you typically pay interest only on the amount you have drawn. During repayment, you pay both principal and interest, and your payment can increase significantly.
If you draw $100,000 from a HELOC at 8 percent interest during the draw period, you might pay $667 per month in interest only. When the draw period ends and repayment begins, that same $100,000 might require a $1,200 monthly payment (principal plus interest) over 15 years. If rates have risen, the payment could be even higher. This unpredictability makes budgeting difficult when you are also carrying a mortgage on the second property.
HELOC versus a mortgage for the second property
| Feature | HELOC for Second Home | Mortgage on Second Home |
|---|---|---|
| What secures the loan | Your primary residence (first home) | The second home itself |
| Interest rate type | Variable (changes over time) | Fixed or variable (you choose) |
| Typical interest rate | Prime + 1–3%, currently 8–11% | Usually 0.5–1.5% lower than HELOC |
| Loan term | 5–10 year draw, then 10–20 year repayment | 15, 20, or 30 years (you choose) |
| What happens if you default | Lender can foreclose on your first home | Lender can foreclose on the second home |
| Monthly payment predictability | Low (rate and payment can change) | High if fixed-rate (payment stays the same) |
A traditional mortgage on the second property ties the debt to that specific house. If you cannot pay the mortgage, the lender forecloses on the second home, not your primary residence. A HELOC ties the debt to your first home, so default puts the house you live in at risk.
Mortgages also typically offer lower interest rates than HELOCs and the option of a fixed rate that does not change for the life of the loan. A 30-year fixed mortgage might be 6.5 percent, while a HELOC might be 9 percent. Over 30 years, that 2.5 percent difference adds up to tens of thousands of dollars in extra interest.
When a HELOC makes sense for a second home purchase
A HELOC can be the right choice if you are buying a second home with cash or a very large down payment and want to preserve liquidity. For example, if you have $200,000 in savings and want to buy a $250,000 vacation home, you might use a HELOC for $50,000 and keep your cash invested. You pay interest only on what you draw, and you can pay back the HELOC quickly without being locked into a 30-year mortgage.
A HELOC also works if you plan to buy the second home, live in it for a few years, and then sell it. If you know you will repay the HELOC within 5 to 10 years, the variable rate risk is lower, and you avoid the closing costs and appraisal fees of a traditional mortgage.
Some buyers use a HELOC as a bridge loan while waiting to sell their current home. If you are buying a second property before your first home sells, a HELOC can provide quick funds while you arrange a mortgage on the new house. Once the first home sells, you repay the HELOC from the proceeds.
Costs and fees to expect
Opening a HELOC usually costs less upfront than a mortgage. Most lenders charge no origination fee, appraisal fee, or closing costs for a HELOC — you may pay only a small annual fee (often $0 to $100) or nothing at all. That makes a HELOC faster and cheaper to set up.
However, the long-term cost is usually higher. Because HELOC rates are variable and typically higher than fixed mortgage rates, you will likely pay more in total interest over time. If you borrow $100,000 at 9 percent on a HELOC and repay it over 15 years, you will pay roughly $54,000 in interest. The same $100,000 at 6.5 percent on a 15-year mortgage costs roughly $35,000 in interest — a difference of nearly $19,000.
Some HELOCs also charge a fee if you do not use the line of credit, or if you close it within a certain period. Read the terms carefully before opening one.
Tax considerations when using a HELOC for a second home
Interest paid on a HELOC is tax-deductible only if the borrowed money is used to buy, build, or improve a home that secures the HELOC. If you use a HELOC on your primary residence to buy a second home, the interest may be deductible because the money was used for a home purchase. However, tax rules are complex and depend on how much you borrowed, what you used it for, and your total mortgage debt.
Consult a tax professional before relying on a deduction. The rules changed significantly after the 2017 Tax Cuts and Jobs Act, and not all HELOC interest is deductible in all situations. A tax advisor can tell you whether your specific use of a HELOC qualifies.
Frequently Asked Questions
Can I get a HELOC if I still owe a lot on my first mortgage?
Yes, but the amount you can borrow will be smaller. Lenders look at your total debt against your home's value. If you owe $300,000 on a $400,000 home, you have $100,000 in equity. Most lenders will let you borrow up to 80 to 85 percent of the home's value, so you might borrow up to $20,000 to $35,000 through a HELOC. The exact amount depends on your credit score and income.
What happens to my HELOC if interest rates rise sharply?
Your interest rate and monthly payment will rise with the prime rate. If you are in the repayment period and rates jump 2 percent, your monthly payment could increase by $200 or more per month on a $100,000 balance. This is why many financial advisors caution against using a HELOC for long-term borrowing — the payment risk is real.
Can I use a HELOC to buy a second home if I have bad credit?
It is much harder. Most lenders require a credit score of at least 650 to 700 to open a HELOC, and better rates go to borrowers with scores above 740. If your credit is poor, a traditional mortgage on the second property may actually be easier to obtain, because the lender is looking at the second home as collateral, not your primary residence.
What if I cannot repay the HELOC?
The lender can foreclose on your primary residence. This is the biggest risk of using a HELOC to buy a second home. You are putting your main house on the line to finance another property. If your financial situation changes and you cannot make payments, you could lose the home you live in.
Is it better to get a mortgage on the second home instead?
For most buyers, yes. A mortgage on the second property itself is safer because default affects only that property, not your primary home. Mortgages also offer fixed rates and longer terms, making payments predictable. The main advantage of a HELOC is speed and lower upfront costs, which matters only if you plan to repay it quickly or use it as a bridge loan.