Yes, you can use a HELOC to buy another house, but it works differently than a traditional mortgage

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 on a second property or to buy another house outright. However, using a HELOC this way carries real risks that a mortgage does not, and lenders have specific rules about how you can spend the money.

The main difference: a HELOC is a variable-rate loan tied to your current home. If you cannot repay it, the lender can foreclose on the house you already own. A mortgage on the new property only puts that new property at risk. Understanding this distinction before you borrow is critical.

Key Takeaways

  • A HELOC can fund a down payment or purchase price on another house, but the loan is secured by your current home, not the new one.
  • HELOC interest rates are variable and typically start lower than mortgage rates, but can rise significantly over time.
  • If you default on a HELOC used to buy a second property, the lender can foreclose on your primary residence.
  • Most lenders require you to have substantial equity in your current home (usually 15 to 20 percent) before they will approve a HELOC large enough to buy another house.
  • Using a HELOC for a down payment is simpler than using it for the full purchase price, because you still get a mortgage on the new property.

How a HELOC works as a down payment source

The most common way to use a HELOC for a second home purchase is to borrow against your current home's equity and use that money as a down payment. You then take out a traditional mortgage for the remaining balance on the new property. This approach spreads your risk across two loans and two properties.

For example: your current home is worth $400,000 and you owe $250,000 on the mortgage. You have $150,000 in equity. A lender might approve a HELOC for $100,000 to $120,000 (typically 80 to 85 percent of your available equity). You use $50,000 of that HELOC as a down payment on a $300,000 house, then take out a $250,000 mortgage on the new property. You now have two monthly payments: one on the HELOC and one on the new mortgage.

This method works because lenders are more comfortable with it. You are not betting the entire purchase on a variable-rate line of credit. The new property has its own mortgage, which is a standard, fixed-rate loan. If rates rise on the HELOC, you still have a stable payment on the larger debt.

Using a HELOC to buy a house outright

Some people use a HELOC to pay the full purchase price of a second property without taking out a mortgage. This is riskier and less common, but it is possible if you have enough equity and the HELOC is large enough.

The advantage is that you own the new property free and clear—no mortgage payment. The disadvantage is that your entire purchase depends on a variable-rate loan. If interest rates rise, your monthly payment on the HELOC can increase substantially. If you cannot afford the higher payment, the lender can foreclose on your primary home.

Lenders are also more cautious about approving very large HELOCs. Most will not lend more than 85 percent of your home's equity, and some cap the total HELOC amount at $500,000 or less, depending on your income and credit. If you need to borrow $400,000 to buy a second house outright, you may not may have access to for a HELOC large enough to do it.

Interest rates and how they affect your payment

A HELOC typically starts with a lower interest rate than a mortgage—sometimes 1 to 2 percentage points lower. This makes the initial monthly payment attractive. However, HELOC rates are variable, meaning they change over time based on the prime rate set by the Federal Reserve.

When you first open a HELOC, you enter a draw period, usually 5 to 10 years, during which you can borrow and repay as needed. Your payment during this time is often interest-only, which keeps it low. After the draw period ends, you enter the repayment period, typically 10 to 20 years. At that point, your payment jumps because you must now repay the principal, not just the interest.

If you use a HELOC to buy a house, you need to plan for both phases. A $100,000 HELOC at 7 percent might cost $583 per month in interest-only payments during the draw period. After the draw period ends and you move to repayment, that same balance could cost $1,100 or more per month, depending on the remaining term. If interest rates have risen, your payment could be even higher.

Equity requirements and how much you can borrow

To may have access to for a HELOC large enough to buy another house, you need substantial equity in your current home. Most lenders require you to have at least 15 to 20 percent equity remaining after the HELOC is approved. This is called your loan-to-value ratio, or LTV.

Here is how it works: if your home is worth $400,000 and you want a $100,000 HELOC, the lender calculates your total debt (existing mortgage plus the new HELOC) as a percentage of your home's value. If you owe $250,000 on your mortgage and borrow $100,000 on the HELOC, your total debt is $350,000. Divided by your home's value of $400,000, that is an 87.5 percent LTV. Many lenders will not go above 85 percent LTV, so you would not may have access to for the full $100,000.

Lenders also look at your income and credit score. You need to show that you can afford both the HELOC payment and the new mortgage payment on the second property. If your debt-to-income ratio is already high, you may not be approved for a large enough HELOC to make the purchase work.

The risk of using your primary home as collateral

The biggest risk of using a HELOC to buy a second house is that you are putting your primary residence on the line. If you cannot make the HELOC payments, the lender can foreclose on your current home, even though the money was used to buy a different property.

This is different from a mortgage on the new property. If you default on the mortgage for the second house, the lender can only foreclose on that second house. Your primary home is protected. With a HELOC, there is no such separation.

Consider also what happens if the real estate market declines. If your current home drops in value and you owe more on the HELOC than your equity is worth, you are underwater on that loan. You cannot straightforward walk away—you are still responsible for the debt. Meanwhile, if the second property also declines in value, you may owe more on both properties than they are worth.

Comparing a HELOC to a mortgage for buying a second home

A traditional mortgage is usually the safer choice for buying a second property. Here is why:

  • Fixed rate: Most mortgages have a fixed interest rate that does not change for 15 or 30 years. Your payment is predictable. A HELOC rate is variable and can rise significantly.
  • Longer terms: Mortgages typically offer 15, 20, or 30-year repayment periods. HELOCs usually have shorter draw periods (5 to 10 years) followed by repayment periods. Your payment can jump dramatically when the draw period ends.
  • Collateral: A mortgage is secured only by the property you are buying. A HELOC is secured by your primary home. If you default, only the second property is at risk with a mortgage. Your primary home is at risk with a HELOC.
  • Approval: Mortgages are standardized products. Lenders have clear guidelines. HELOCs vary more by lender and may be harder to get approved for if you have less-than-perfect credit.

The only real advantage of a HELOC is that you may may have access to faster and the initial rate may be lower. If you are buying a second property as an investment or rental, and you have strong equity in your primary home, a HELOC can work. But for most people, a mortgage on the new property is the more stable choice.

What happens during the repayment phase

Many people focus on the initial HELOC payment and forget about what comes next. When your draw period ends—usually after 5 to 10 years—your HELOC enters the repayment phase. At that point, you can no longer borrow new money, and your payment changes dramatically.

During the draw period, you might pay only interest, which keeps the payment low. During repayment, you must pay both principal and interest, and the payment is spread over the remaining term (usually 10 to 20 years). A $100,000 HELOC at 7 percent might cost $583 per month during interest-only draw, but $1,100 per month during repayment.

If you used the HELOC to buy a second house, you need to plan for this payment increase years in advance. Some people refinance the HELOC into a fixed-rate loan before the repayment phase begins, but that requires going through the approval process again and may lock in a higher rate if market conditions have changed.

Frequently Asked Questions

Can I use a HELOC if I still owe money on my current mortgage?

Yes. Lenders will approve a HELOC even if you have an existing mortgage, as long as you have enough equity. The HELOC becomes a second lien on your home, behind the mortgage. Your total debt (mortgage plus HELOC) cannot exceed about 85 percent of your home's value in most cases.

What if interest rates rise after I open the HELOC?

Your HELOC payment will increase. Unlike a fixed-rate mortgage, there is no rate cap on most HELOCs. If the prime rate rises, your rate rises with it. This is why using a HELOC for a large purchase like a second home carries more risk than a mortgage. You should budget for the possibility that your payment could rise 2 to 3 percentage points over the life of the loan.

Can I use a HELOC to buy a rental property?

Yes, you can use a HELOC to buy a rental property. However, lenders may treat it differently than a primary residence purchase. Some lenders require a higher down payment or charge a higher interest rate for investment properties. You should also consider that rental income may not count toward your debt-to-income ratio the way employment income does, which could affect your approval.

What if I want to use the HELOC for the full purchase price, not just a down payment?

You can do this, but it is riskier. You will need a very large HELOC, and most lenders cap them at 85 percent of your home's equity. If you need to borrow more than that, you may not may have access to. You should also be prepared for your payment to increase significantly when the draw period ends and repayment begins.

Is a HELOC better than a cash-out refinance for buying a second home?

A cash-out refinance replaces your current mortgage with a new, larger one and gives you the difference in cash. This can be simpler than opening a HELOC because you have one payment instead of two. However, a cash-out refinance locks you into a new rate on your primary home mortgage, which may be higher than your current rate. A HELOC lets you keep your existing mortgage and borrow separately. The choice depends on your current mortgage rate and how much you need to borrow.