Can you use a home equity loan to buy another house?

A home equity loan is a convenient way to borrow your equity without refinancing. You can use the money you borrow for anything you like, including buying another home or an investment property. In this guide, we’ll explain how it works, when it makes sense, and the risks to watch out for, then compare alternatives like a home equity line of credit, or HELOC, or a cash-out refinance to choose the right path.¹

What is a home equity loan?

Home equity is the difference between your home’s value and what you owe on it.² For example, if your home is worth $350,000 and your mortgage balance is $200,000, you have $150,000 in equity.

A home equity loan is a second mortgage that uses your equity as collateral. You receive a lump sum and make payments over a set term, usually at a fixed interest rate.

“A home equity loan is one of the easiest ways to lay hands on what is often a homeowner’s biggest asset – their home,” says Tim Choate, a personal finance expert and real estate professional in Petaluma, California.

You can use a home equity loan for a down payment on another property.

“While each lender has its own standards, most home equity loans can be used for any purpose, including putting money down on a second home,” says Todd Christensen, a housing counselor in Pocatello, Idaho. “Credit, income, and the amount of equity left in your first mortgage will all come into play, though, when determining the size of your home equity loan.”

Advantages of a home equity loan

A home equity loan is a convenient way to borrow money at low interest rates to buy another property. Other benefits include:

• You can increase your down payment. You receive a lump-sum payment with a home equity loan. Using that money as a down payment on an investment property can reduce your monthly payment and interest rate.
• You can solve financing challenges. Buying a second property typically is more difficult because lenders have stricter credit and down payment requirements. A home equity loan can be a relatively simple and affordable solution for homeowners looking to buy an investment property.
• Your interest rate will likely be lower. You can avoid high interest rates with a home equity loan because your home serves as collateral. Lenders also may offer lower fees and closing costs. “You enjoy stable rates and consistent payments every month, as well as access to a lot of money at cheaper rates than personal loans or credit cards if you need it,” says Choate.
• You may be able to access funds more quickly. A home equity loan can close as soon as 2 weeks.

“Also, for any homeowner who has struggled with consumer spending, a home equity loan has the advantage of requiring repayment and preventing additional borrowing, compared to a home equity line of credit," Christensen says. "This minimizes the possibility of getting into too much debt."

Rocket Mortgage® doesn't currently offer HELOCs.

Disadvantages of a home equity loan

Despite the benefits of using a home equity loan to buy an investment property, there are some risks.

• You’re trading an asset for debt. When you take out a home equity loan, you’re trading equity for debt.
• You’re vulnerable to shifts in the housing market. If market values fall, your home equity can decline with it. This can reduce your home's value and affect your return when you sell the property.
• You could have three mortgages for two homes. A home equity loan is a second mortgage on a primary residence. You also need a separate mortgage to finance your second home. That means you’ll likely have three mortgages for two properties.
• Your interest payments may not be tax-deductible. It's wise to consult with an experienced accountant before making any decisions. Changes to the tax code due to the Tax Cuts and Jobs Act of 2018 and to rules on itemized versus standard deductions may affect the deductibility of interest payments on home equity loans.
• Your primary residence is at risk. Because you’ll need to pledge your home as collateral for the home equity loan. “If you can’t pay up, your primary home is on the hook,” Choate says.

Alternative methods to using home equity to buy a second home

There are other financing options to consider for buying another property.

• Hard money loans: These are high-interest loans typically secured by property and funded by private investors and companies. “These are usually shorter-term loans from private lenders that have higher interest rates,” says Stephanie Goldstein, an attorney and partner at Schorr Law in Los Angeles.
• Seller financing: The seller takes the place of a traditional mortgage lender and finances the purchase themselves. You repay the seller in installments until the loan is paid in full. Seller financing generally offers more flexible loan terms but comes with higher interest rates and a larger down payment.
• Peer-to-peer lending: P2P loans are personal loans, and no collateral is required to secure them. The loans are funded by individuals or groups of investors instead of traditional financial institutions. You may get a lower interest rate and more flexible terms if you have excellent credit. “However, the amount you can borrow is typically limited compared to traditional lenders,” Christensen says.

FAQ

Here are answers to common questions about using a home equity loan to buy another home.

When can I sell my house after taking out a home equity loan?

You can sell at any time. There’s no set time limit to sell your house after taking out a home equity loan. However, you must pay off all liens on the home before you can closer the sale. This includes your home equity loan, because your home acts as collateral for the loan.

Will a home equity loan put my mortgage underwater?

An underwater mortgage happens when a home loan’s principal balance exceeds the home’s appraised value. This scenario typically occurs when a property’s value falls as a homeowner repays their mortgage. A home equity loan by itself usually won’t cause an underwater mortgage but, if you borrow too aggressively, it can contribute to being underwater.

The bottom line: You can use your home equity to buy another house

You can use your home equity to buy a second home or investment property. As with any borrowing decision, this has benefits and risks that must be carefully weighed. A home equity loan can provide a lump sum for investment at reasonable rates, but doing so increases your debt and puts your home at risk if you default.

If you're ready to explore your borrowing options, apply today with Rocket Mortgage.

¹ Refinancing may increase finance charges over the life of the loan.

² 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 2/5/2024 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 Schwab 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. Not available in Texas. This is not a commitment to lend.