Using a HELOC for a down payment on a second home

Purchasing a vacation home or investment property requires strategic financial planning – and that includes a down payment. Putting down at least 20% of the property's value can accelerate loan approval and eliminate the burden of private mortgage insurance (PMI). For many buyers, a home equity line of credit (HELOC)¹ presents an attractive solution. This flexible credit line, secured by your primary residence, lets you access your home's equity to fund that down payment on a second property. But before you commit to this approach, it's worth weighing the benefits against the potential drawbacks.

While Rocket Mortgage doesn't currently offer HELOCs, we do provide cash-out refinance² options that may help.

Key takeaways:

• HELOCs let you tap home equity for large expenses, including a second-home down payment. A home equity line of credit allows you to borrow against the equity in your primary residence as needed.
• HELOCs offer flexibility and potential cost advantages. Benefits may include access to a larger down payment amount, flexible borrowing, preservation of savings, potentially tax‑deductible interest, and lower closing costs compared to some refinancing options.
• HELOCs also come with important risks to consider. Variable interest rates, the temptation to overborrow, reduced equity in your primary home, and the risk of foreclosure if you default can all impact your long‑term financial stability.

Can you use a HELOC for a down payment on a second home?

Yes, if you already own a property and have sufficient equity to qualify for a home equity line of credit, it is possible to use a HELOC for a down payment on a second home. However, you need to keep in mind that some lenders may not allow down payment funds to come from a HELOC and that you still need to meet qualification requirements.

A HELOC is a new, secured loan that can increase your DTI ratio and impact your credit, so be sure you can still qualify for the new mortgage after taking out a HELOC. Also keep in mind that your primary home serves as collateral for the HELOC, so you’re effectively putting your primary home at risk when you use a HELOC to make a down payment on a second property.

How using a HELOC for a second-home down payment works

A home equity line of credit is a type of revolving credit line based on your home equity. You can draw funds from a HELOC, up to the limit set by your lender, multiple times and on an as-needed basis up to the credit limit.

We’ll break down how HELOCs work.

How much HELOC funding may be available

A HELOC is secured by the equity of your home, so how much you can borrow will depend on the value of your home and any remaining mortgage balance on it. The key measure is your loan-to-value (LTV) ratio.

For example, if your home is worth $400,000 and you owe $300,000 on the mortgage, you have $100,000 in equity. Most lenders will let you borrow money until you have an 80% to 85% LTV ratio.

In the above example, an 85% LTV ratio would mean a total loan balance of:

$400,000 * (.85) = $340,00

So you could borrow as much as:

$340,000 - $300,000 = $40,000

What HELOC funds can be used for

HELOCs are highly flexible loans, so you can use them for just about anything. That can include making a down payment on another home, covering closing costs, or paying for repairs and renovations.

However, the lender for your second mortgage may place some restrictions on its own loan offerings. For example, because a HELOC is debt, the second lender may not be willing to look at your HELOC as a source of cash reserves to satisfy its minimum savings requirements.

How HELOC payments work

HELOCs have two phases: a draw period and a repayment period.

During the draw period you can take additional money out of your HELOC and typically make interest-only payments each month. After the draw period comes the repayment period where you make full principal and interest payments.

HELOCs typically have variable interest rates but there are also fixed-rate HELOCs. With a variable interest rate, your payment can change over time.

Keep in mind that if you use a HELOC to make a down payment on a second home, you’ll be dealing with three monthly payments at once: your primary mortgage, your second home’s mortgage, and your HELOC.

HELOC requirements for a second-home down payment

A HELOC is a type of loan, so lenders will want to make sure you can afford to make your monthly loan payments. Each lender can set its own requirements but will generally look at similar factors.

Equity and LTV requirements

HELOCs are secured by your home equity, so lenders will want to make sure that your home is worth enough to secure the new loan. Most lenders will only offer a HELOC if you have more than 15% equity. Put another way, your LTV ratio must be under 85%.

Typically, the amount you can borrow will be based on this equity/LTV limit. You can only borrow up to an 85% LTV ratio, so if you’re sitting at 84%, for example, your HELOC limit will be quite low.

DTI, income, and credit review

If you have sufficient equity, lenders will also want to ensure you can afford to make payment on a new loan.

To that end, lenders will examine your income and debt-to-income (DTI) ratio. Your income must be sufficient to handle payments on a new loan. For an extreme example, if you make $2,000 a month and your new loan payment would be $3,000, there’s no chance a lender would approve that loan.

Your DTI ratio measures the percentage of your monthly income that goes toward loan payments. Most lenders won’t let you go above a 43% DTI ratio when including your new loan’s payments, so the lower your DTI ratio, the better.

Even if you’re financially capable of making payments, lenders will also want to check that you have a track record of making payments. They’ll check your credit history. The higher your score, the better your odds of qualifying and securing a low interest rate.

Cash reserves and borrowed funds

When you get a mortgage, many lenders will require that you have sufficient cash reserves to handle some of the unexpected costs of homeownership and to serve as a cushion should you have financial issues and still need to make mortgage payments.

Depending on the lender, you may not be able to use the funds available through your HELOC or other borrowed money to meet cash reserve requirements, so check with the mortgage lender for your second property before applying for the HELOC.

Documents you may need to apply

Lenders won’t just take you at your word when you list information about yourself in a loan application. You’ll need some documentation and proof of things like assets, income, and employment.

Some documents to have on hand include paystubs, tax returns, bank and investment account statements, and proof of identity.

HELOC for a second-home down payment: Pros and cons

There are advantages and disadvantages to using a HELOC for a down payment on a second home. You can use It’s best to consider all relevant factors before making such a large financial decision.

Pros of using a HELOC for a down payment

Some benefits of using a HELOC for a down payment include:

• Large down payment funding: If you’ve built up a significant amount of home equity, you could have access to a large pile of cash for a down payment. Use a down payment calculator to estimate how much you’ll need.
• Flexible credit access: Unlike a traditional fixed-term loan, you can borrow up to the credit limit at any time, or just a small portion.
• Preservation of your savings: Instead of tapping into your savings or investments, you’re able to use the value in your existing home to fund the closing costs of a new home purchase.
• Initial interest-only payments: Some HELOCs may allow for interest-only payments initially, which can help you preserve cash during the closing process for the new home.
• Potentially tax-deductible interest: Regular mortgage loan interest is generally tax-deductible for a primary residence. The rules are a little more complicated for HELOCs, but the interest may be deductible in some cases.
• Lower closing costs than other refinancing options: Some HELOCs may be available with no closing costs, which can be a big savings compared to refinancing or taking out a second mortgage.

Cons and risks to consider

Some reasons to consider avoiding using a HELOC for a down payment are:

• Variable rates/payments: Variable rates and interest-only payments can lead to less predictability than a long-term fixed-rate loan.
• Potential to overborrow: If you borrow more than you need, you may be tempted to use the leftover cash for additional home projects, which leads to higher long-term costs.
• Diminished equity: Home equity isn’t a bank account. When you take out a HELOC, you’ll get less cash when selling your home in the future if you don’t repay the full balance before selling the property secured by the HELOC.
• Risk of foreclosure for default: Because it’s a secured loan, if you stop paying as agreed, you could lose your home to foreclosure. Just like a mortgage or fixed-term home equity loan, it’s critical to keep up with payments.

7 steps to using your HELOC for a down payment

If you’re going to use a HELOC for a down payment on a second home, follow these steps.

1. Assess your current financial position

Before you buy a second home, take a moment to assess your finances and make sure you can truly afford the cost of a second home.

If you need to use a HELOC to finance the down payment on the second home, you might not have sufficient savings to truly afford it. On the other hand, if you’re using the HELOC to boost your down payment to avoid PMI or land a lower rate, you might have less to worry about.

Consider your investments, income, and cash reserves to make sure you’re prepared to add both a new mortgage payment and HELOC payment to your monthly budget.

2. Determine your loan-to-value ratio (LTV)

Your loan-to-value ratio measures the appraised value of the home you want to buy against the loan amount that you’re seeking to borrow. The lower your LTV, the more likely you’ll be approved for a mortgage by prospective lenders.

For instance, if you want to buy a house valued at $100,000 and can make a $10,000 down payment, your loan is $90,000, or 90% LTV. Most lenders want the LTV on a HELOC to be 85% or less.

Here’s an example of the maximum amount of credit you can qualify for based on how the LTV is calculated for a HELOC:

• If your home’s appraised value is $500,000 and you still owe $300,000 on your mortgage, then you have $200,000 in equity.
• Multiply the home’s current value by the 85% LTV: $500,000 x 0.85 = $425,000.
• From that amount, subtract how much you currently owe on your first mortgage to get your maximum allowed HELOC: $425,000 – $300,000 = $125,000.

3. Prepare your finances for the second home

Before making any large financial commitment, it’s a good idea to prepare your finances to ensure you can afford the purchase or loan. In this scenario, you would want to budget for a primary and a second home mortgage, plus HELOC payments, two sets of property taxes, home insurance, utilities, HOA dues (if applicable), and other homeownership costs.

At the same time, you fund a down payment, you may have to pay closing costs on both the HELOC and new mortgage, often 2% – 6% of the loan amount. Having access to plenty of cash is helpful.

4. Shop for HELOC lenders

When you’re getting any kind of loan, it’s in your best interest to shop around to try to get the best deal.

Compare a few different lenders, looking at the interest rates, fees, loan repayment terms, and any special features during the draw or repayment periods, such as the option to convert the loan to a fixed-rate loan when repayment begins. Then, choose the one that fits your budget and needs.

5. Apply for a HELOC for the down payment

Much like when you applied for the loan for your current home, a mortgage lender will want to assess all your financial commitments when underwriting a HELOC. When you apply for a HELOC, be prepared to submit tax returns, financial statements, and other personal finance details.

The lender will determine the maximum credit limit they can offer by calculating the LTV of your current home. Once you’ve closed on your HELOC, you can apply any or all of those funds to a down payment on a second home.

6. Find a second home and apply for the second-home mortgage

Finding a second home is a very similar process to finding your first home. A good real estate agent can point you to the best neighborhoods for your lifestyle and budget. They’re also a helpful asset when making offers and negotiating with sellers.

Then, it will be time to find a lender and apply for a loan.

Much like buying a primary home, buying a second home requires a down payment and a mortgage (unless you’re paying cash). Typically, the down payment on a second home is higher, at least 10% of the home’s value, because second mortgages are riskier investments. You’ll need to find a lender and go through the mortgage application process.

7. Close on your second home and manage your new obligations

You’re probably already familiar with the closing process from buying your current home. The entire process, from application paperwork to appraisals and inspections to closing, usually takes 30 – 45 days.

At closing, you should receive clear documentation from your lender explaining when payments start and how much you’ll owe. Make sure to always make at least the minimum payment for every loan by the due date to avoid default and build a positive credit history.

When using a HELOC for a second-home down payment makes sense

Before using a HELOC to make a down payment on a second home, take a moment to consider whether it’s the best move for you financially.

When a HELOC may fit

A HELOC may be a good fit for making a down payment on a second home in a few different scenarios:

• You have significant equity. If you have a lot of equity in your primary home, a HELOC can be a large source of funding and sufficient to cover a down payment.
• Stable income. HELOCs can quickly go south if you hit financial difficulties because you’ve put your primary home at risk. However, if you have stable income and employment, they can be less risky.
• You can avoid PMI on the new mortgage. If using a HELOC can help you avoid paying for mortgage insurance on your new home, the HELOC can be a good way to reduce the cost of your second mortgage.

When to consider alternatives

Using a HELOC to make a down payment on a second home can be risky, so in some scenarios you should consider other options.

• You don’t have much equity. Most lenders will set your HELOC limit so that you maintain an 85% LTV ratio. If you only have 20% equity in your home, you might not be able to borrow enough to make a down payment.
• Unstable employment. If your income or employment isn’t steady, you should avoid putting your primary home at risk by leveraging it with a HELOC.
• Rising interest rates. HELOCs typically have variable interest rates, so if rates are on the rise, you might want to look at fixed-rate loan options.
• Risk aversion. A HELOC puts your primary home at risk for the benefit of your second home. If you don’t like the idea of leveraging your primary residence, you should avoid using a HELOC.
• A tight budget. Using a HELOC to make a down payment on a second home means adding two new payments to your monthly budget: a HELOC payment and a second mortgage payment. If things are already tight, you might struggle to handle the added payments.

Questions to ask before applying

Before applying for a HELOC, ask yourself these questions:

• Can I afford two new bills each month?
• Do I have stable enough income or sufficient savings to not worry about these payments?
• Are rates on the rise or fall? If they rise in the future, can I afford increased HELOC payments?

Other down payment options for a second home

While a HELOC is an option for a second-home down payment, it’s not the only choice. Here’s a look at alternatives, some of which may be a better fit.

Home equity loan

Though similar to a HELOC, a home equity loan is different in that you receive a lump sum payment and make predictable monthly payments set at a fixed interest rate. Since it uses the fixed collateral of your home equity, it’s considered a less risky loan and therefore has a lower interest rate than, say, a credit card or personal loan.

However, taking a home equity loan still involves some risk. It turns an asset (your home’s equity) into debt, adds another mortgage payment to your budget, and makes you financially vulnerable to downturns in the real estate market.

Cash-out refinance

Another way to get funds for a down payment on a second house is by doing a cash-out refinance on your primary home’s mortgage. In a cash-out refinance, you take advantage of the equity you’ve built by taking on a larger mortgage, paying off your current mortgage, and pocketing the difference. This difference can be used as a down payment.

With a cash-out refinance, you would have just one additional monthly payment instead of two. You could choose a 30-year fixed-rate mortgage or a shorter term if you can afford a higher monthly payment. If you’re eligible, a VA loan cash-out refinance³ may allow you to borrow up to 100% of your home’s equity.

Cash payment

If you have enough savings to pay the down payment in cash, you avoid the trouble and time it takes to get a loan. You also save all the money you would pay in interest over the life of a loan, and avoiding the extra debt can be good for your credit score.

The downside to making your down payment in cash is that the funds are now sunk into the real estate investment. You don’t have access to them for other expenses, known and unknown. However, if you can pay cash without significantly draining your cash reserves, this might be a good option.

Bridge loan

A bridge loan is a type of short-term loan that you can use until you can secure permanent financing. They often last for just a few months.

These loans are popular if you’re selling a home and need to buy a new property while waiting for your previous one to sell. However, they can also be helpful if you are planning to keep your previous home.

For example, if you’re working on selling off a less liquid asset, such as a car, and plan to use that to help fund the down payment on a second property, a bridge loan can help you buy a home now while you finish the car sale. You can then use the cash from selling the car to pay off the bridge loan.

Seller financing

With seller financing, you borrow money directly from the person selling the home rather than from a mortgage lender. This can be complicated because the seller has to be comfortable with offering you a loan, but it can work out if you have a willing seller and are borrowing a smaller amount.

For example, you can get a traditional mortgage to buy the home but ask the seller to lend you the amount of the down payment. This can help you offer a sufficient down payment or avoid PMI and keeps the seller’s risk lower than if they had offered full seller financing.

Home equity investment

A home equity investment (HEI) is a way to get cash from a home without having to take on a new monthly payment. It involves selling a portion of your home to an investor. In the future, you repay a lump sum to that investor, either after a period, when you die, or when you sell the home.

These can sound appealing due to the offer of upfront cash for a future payment, but HEIs can wind up being very expensive. You might get cash equal to 10% of your home’s current value but have to repay 25% or more of your home’s future value appreciation, meaning you lose out on significant equity gains.

401(k) loan

A 401(k) loan allows you to borrow money from your retirement account. This works like other types of loans, requiring monthly repayment, but instead of paying interest to a lender, you wind up paying interest as you pay the money back into your 401(k).

This can be an appealing option if you have enough money in your 401(k). However, keep in mind that when you lend money out of your retirement account, you could miss out on investment gains, which could have a major impact on your future retirement.

FAQ

Before getting a HELOC to make a down payment on a second home, keep these considerations in mind.

Is it worth using a HELOC to buy a second home?

Using a HELOC to buy a second home may be a good idea if you have significant equity, stable income, and the funds from the HELOC can help you secure a cheaper mortgage, such as by avoiding PMI.

Can your mother gift $200,000 for a down payment on a house?

Yes, your mother could gift you money, including a large amount, for a down payment on a HELOC. However, lenders will want confirmation that the money is truly a gift and not a loan from a family member, so be ready to provide a letter from your mother to that effect.

How much would a $50,000 HELOC cost per month?

How much a $50,000 HELOC costs each month depends on whether you’re in the interest-only payment draw period or the repayment periods, as well as the interest rate and term. Assuming a $50,000 loan, a 6% interest rate, and a 10-year repayment term, the interest-only payment would be $250 and the full payment would be $555.10.

What does Dave Ramsey say about HELOCs?

Dave Ramsey is a popular personal finance personality. He tends to be averse to debt and recommends against using HELOCs, but for financially stable people who understand the pros and cons, using a HELOC may be a good fit in some situations.

Can you get a HELOC on a second home?

Yes, you may be able to get a HELOC on a second home once you have sufficient equity. However, lenders may view that as a riskier proposition and charge a higher interest rate or have stricter underwriting requirements.

Can you use a HELOC for a down payment on an investment property?

Yes, the advice in this article applies to investment properties as well as second homes. It is possible to use a HELOC to make a down payment on a second home.

The bottom line: Carefully consider using a HELOC for your down payment

A HELOC can be an excellent option for homeowners looking to buy another property. Whether you’re planning to buy a second home or investment property, a HELOC may be a reasonable choice.

If you don’t think a HELOC is the best choice, you can also look at a loan with fixed, predictable monthly payments. Apply for a home equity loan or mortgage today to get started.

¹Home Equity Loan Product is a second standalone lien and may not be used for piggyback transactions. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Not available on Ameriprise products. Additional restrictions, terms, and conditionsapply. Must meet qualification requirements. This is not a commitment to lend.

²Refinancing may increase finance charges over the life of the loan.

³Rocket Mortgage is a VA approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.