Using a HELOC for a down payment on a second home

If you’ve been thinking about buying a vacation home or rental property, a key component of the purchase is a down payment. Savvy buyers aim to put down at least 20% of the property’s value, which can help with both loan approval and avoiding the added expense of private mortgage insurance (PMI).

A home equity line of credit (HELOC) is a type of loan that’s secured by a home. You’re able to draw up to the loan’s limit and repay it multiple times, somewhat like a credit card. But because it’s secured by your primary residence, the limit could potentially be high enough to cover that down payment on a second property. Follow along for a look at the pros and cons of using a HELOC for a down payment on a second home.

Rocket Mortgage doesn’t offer HELOCs at this time. But if you’re looking for a cash-out refinance, we can help!

How does it work to use a HELOC for a down payment?

A home equity line of credit, more commonly known as a HELOC, is a secured revolving line of credit tied to your home. If you’ve owned your home for a long time, there’s a good chance you’ve built up significant equity. A HELOC lets you tap into that balance for major purchases like a home improvement project or down payment on a second home.

Since it’s a revolving line of credit, you can draw from the loan and repay it multiple times. You may be able to access funds via a dedicated checkbook, a debit card, or an online transfer, depending on the lender.

Unlike a credit card, where the balance rises and falls with spending and payments, each draw typically has its own repayment period. Each draw may have its own minimum monthly payment. Interest rates are typically variable, but some lenders offer fixed-rate HELOCs. You may also find a hybrid, where the rate is fixed on each draw based on the current market rate, but future draws could have different rates.

The HELOC limit is based on a combination of the home’s available equity, the lender’s maximum loan-to-value (LTV) requirements, and other information from your personal finances, such as your income, monthly debt obligations, and credit history.

If you’re considering a HELOC for a down payment, remember that you’ll end up with three monthly payments: one for your first property’s mortgage, one for the HELOC, and one for the second property’s mortgage.

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. It’s best to consider all relevant factors before making such a large financial decision.

Pros

• 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

• 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.

6 steps to using your HELOC for a down payment

When you open a HELOC for the down payment on a second home, you’re not limited to using the funds for the down payment. You have the flexibility to borrow, pay off the balance, and borrow again up to the credit limit, which can help you cover the cost of improvements or repairs at either property. Here are the steps to using a HELOC for a down payment:

1. 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.

2. 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.

Also, take a look at your credit report and credit score, and calculate your debt-to-income ratio (DTI) to gauge your likelihood of approval.

3. 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.

4. Find a second home

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.

5. Apply for a loan for your second home

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.

6. Close on your second home

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.

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.

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.

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.

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

Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 11/19/25 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Ameriprise products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher priced loans are not allowed on properties located in New York. Additional restrictions apply. This is not a commitment to lend.