Once you’ve built equity in your second home, you may be ready to start renovations, consolidate high-interest debt, or cover emergencies. Any way you look at it, pulling the equity from your second home enables you to cover the projects you’ve been waiting on.
No matter how you plan to use the equity in your second home, you must first know whether it’s possible.
We researched whether you can take out a home equity line of credit (HELOC) or a home equity loan on a second home. We’ll go over factors you should consider, risks, and alternatives.
In this guide:
- Can you take out a home equity loan or HELOC on a second home?
- Do lenders consider my other debt during application?
- Is borrowing money on a second home more expensive?
- What are the risks of a home equity loan on a second home?
- Should I take out a home equity loan or line of credit on a second home?
- Tax considerations
Can you take out a home equity loan or HELOC on a second home?
In most cases, you can use your second home’s equity by getting a home equity loan or HELOC. The option you choose depends on how you plan to use the funds.
|What is it?||Variable or fixed rate?||When it may work best||Example|
|HELOC||Credit limit based on available equity||Often variable, with the lender-specific option to choose fixed rates for portions.||If you’re unsure how much you’ll need|
If you want to use it for multiple purposes
Smaller home renovations
|Home equity loan||Lump sum of your equity repaid in equal installments||Often fixed||If you need a one-time lump sum||Paying off high-interest credit card debt|
Financing college tuition
Larger home renovations
Home equity loans are straightforward with a fixed interest rate. In comparison, HELOCs are revolving credit during the draw period (typically 10 years) followed by a repayment period where the interest is fixed.
Use and repay the HELOC as often as needed during your draw period, and you’ll only pay for what you borrow (plus any interest). In this way, it’s comparable to a credit card.
In September 2022, we recorded an average interest rate of 5.63% on HELOCs, but with the recent rate increases from the Federal Reserve, this could be higher now. Even with rate increases, this option can be less expensive than credit cards.
The lower rate is partly because your home backs the line of credit, whereas credit cards are unsecured. HELOCs can work well in situations where you’re not sure of the final amount you need, such as:
- Emergency repairs
- Smaller home renovations
- Wedding planning
If the cost is less than you expected, you’ll save money on monthly payments. If you need more, you can pay down the HELOC and use it again without applying for a new loan.
Whether you choose a home equity loan or HELOC, you can take out either on your second home. To go through with home equity financing on a second home, prepare to meet several lender home equity requirements:
- Credit score (often least 700)
- Debt-to-income (DTI) ratio (often below 43%)
- Ownership time (often at least one year)
- Loan-to-value ratio (LTV) (often 85%)
- Home appraisal
- Cash cushion
Buying a primary residence has less stringent requirements around credit and DTI. Homebuyers often need a credit score of 620 to qualify for a conventional primary home purchase. To minimize risk, many lenders require a credit score of 700 to qualify for a HELOC on a second home.
Why are requirements different for HELOCs and home equity loans on second homes compared to the primary residence?
Lenders have higher standards for second homes because when borrowers face financial hardship, lenders expect them to prioritize paying toward the home they live in. It can be more challenging to apply for a HELOC than a home equity loan, but it’s no easier to qualify. You’ll still find lower LTV maximums, appraisals, and financial scrutiny.
Many banks and lenders want to see DTI ratios below 43%. This tells them how much of your income is dedicated to paying debts. Set yourself up for success by having at least six months of living expenses set aside as a cash cushion.
Your home equity loan needs to meet your lender’s LTV requirements. Calculate your LTV with the following formula:
Current home value / Remaining loan balances on the property
Most banks will allow you to borrow 80% to 85% of your home’s LTV.
To better illustrate this, let’s work through an example. Let’s say you bought your second home for $400,000. You’ve owned it for several years and made a sizable down payment at purchase. Your mortgage balance is now $310,000, and the home appraises at $450,000.
($310,000 / $450,000) x 10 = 68.8% LTV
You want to get a home equity line of credit for $50,000. Add that amount to the remaining balance on your mortgage to find your new LTV:
$310,000 + $50,0000 = $360,000
($360,000 / $450,000) x 10 = 80% LTV
If your lender lets you borrow up to 80% LTV, you’re in the clear.
Due to current market conditions, several major lenders have stopped offering home equity products, but others are accepting applications. Find out more in the table below:
|Lender||Allows HELOCs on second homes?||Allows home equity loans on second homes?||Restrictions||Requirements|
|PNC Bank||Yes||Yes||Not offered in Alaska, Hawaii, Louisiana, Mississippi, Nevada, and South Dakota |
No investment properties
Up to 80% LTV
|$50 annual fee|
10-year draw period
Good credit history
At least 2 years of steady income
|Truist||Yes||No; only conversion to a fixed-rate option||Must occupy the home at least 14 days per year|
Lender must be in 1st or 2nd lien position
Not available for investment homes, cooperatives, mobile homes, or manufactured homes
|$50 annual fee in some states|
Minimum draw of $5,000
Good credit needed to qualify
|M&T Bank||Yes||No, but fixed-rate conversions are available||Maximum LTV of 70.99% for second homes|
Maximum loan amount of $250,000 for vacation homes
Only available in 14 states*
|Minimum loan amount of $15,000|
Interest-only or principal-only payments for the first 10 years
*Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Vermont, Virginia, Washington, District of Columbia, and West Virginia
You might be able to find favorable home equity offers from banks with which you’re established. Some offer interest-rate discounts to schedule automatic payments from an account with that bank.
Do lenders consider my other debt during the application process?
Yes. Lenders consider your debt capacity if you apply for a HELOC or home equity loan on your second home. This includes:
- Your primary home
- Student loans
- Other revolving loans
Part of the financial analysis and underwriting process includes accounting for the following information about your debts:
- Your credit rating, including late or missed payments
- Remaining balances on your loans
- Monthly debt payments
- Your primary home’s current value
- Loans against your primary home
This essential information helps lenders determine whether it’s wise to lend you more money.
If you have substantial debt compared to your income—i.e., a primary mortgage, a recent home equity loan on the property, a boat loan, auto loans, and student loans—it could set off red flags for your lender.
You could be denied or approved for less than you applied for. Banks and lenders are already cautious about lending for secondary homes, so they’re diligent about decision-making.
Is borrowing money on a second home more expensive than a primary home?
Borrowing from the equity on a second home is often more costly than buying a primary home.
Most lenders assign higher interest rates for secondary, investment, or vacation homes.
Other fees may be similar to those on a primary home purchase, including:
- Closing costs
- Subordination fees
- Origination fees
- Loan processing fees
- Appraisal fees
This isn’t true for every lender, but you should be aware of fees, including whether the lender will roll them into your loan or you’ll need to pay them upfront. Lenders must disclose rates and fees when providing information about home equity financing.
Borrowing money from a second home is more expensive because it’s at a higher risk of default. In the economic downturn from 2007 to 2009, 35.6% of foreclosures were from strategic defaults, meaning homeowners could afford payments but refused to pay because their home was worth less than they paid.
During financial hardships, people are more likely to default on their second home rather than their primary home. To account for the increased risk, lenders charge extra interest and fees.
What are the risks of taking out a home equity loan or HELOC on a second home?
A HELOC or home equity loan on a second home can provide the finances to take care of home repairs, transform your kitchen, or rid yourself of credit card debt. But it also comes with significant risks, including:
- Your home is collateral, so default results in foreclosure.
- Potential legal action for defaulting in some states
- You risk a negative equity position in the second home if the housing market drops.
- Since a HELOC works like a credit card, you could overspend.
- If you run out of money on a home equity loan, you must apply for another loan.
- Another monthly payment could be excessive.
- Variable rates on the HELOC could mean an unexpected increase in payments.
- Potential prepayment penalties on home equity loans and early closure penalties for HELOCs.
- Lenders can terminate or cancel HELOCs without notice, essentially converting the HELOC to a home equity loan with the current HELOC balance as the balance of the loan. If this happens, you can’t draw additional funds on the HELOC.
Account for these risks before deciding whether to apply for a HELOC on a second home. You can avoid many risks with the right lender, but others require financial prowess to overcome.
Should I take out a home equity loan or line of credit on a second home?
Deciding whether to take out a home equity loan or line of credit on a second home depends on your financial situation. Significant risks are associated with this form of equity financing, so be cautious.
Ask yourself the following questions before making a choice:
- What are other, less expensive ways to finance my goals?
- Do I have an emergency fund to handle financial setbacks?
- Would this interrupt my other money goals?
- Do I have a steady, substantial income to maintain payments?
- Is my credit score high enough to qualify?
- Will I benefit from potential tax deductions? (We recommend consulting a tax pro.)
- What’s my repayment plan?
Reflecting on your financial position can help determine whether this is a wise decision.
Have you racked up a large amount of equity in your second home? Need to finance some home projects without restarting your mortgage term? This could be worth considering.
Tax considerations with debt on second homes
Home equity loan and HELOC interest may be deductible on your taxes if you use the proceeds for substantial home improvements. But if you use the proceeds from the loan for other purposes, such as paying for college, home repairs, or debt consolidation, you can’t deduct the interest.
If you rent out your second home part-time and declare rental income on your taxes, you may be able to deduct the interest on your second home. But you must use the proceeds of the loan for home improvements.
What qualifies as a home improvement?
For example, interest on a loan you used to renovate a kitchen is likely not tax-deductible. This is considered a renovation, not an improvement that “substantially improves” the home.
On the other hand, interest on a loan used to add a bathroom or deck where there wasn’t one before likely would be deductible.
If you rent out your second home and have placed it in a business entity, such as an LLC, the LLC must get the property loan. Lending institutions have different rules regarding entity loans, and interest rates may be higher.
In all cases, we recommend you consult a qualified tax advisor.
Alternatives to a HELOC or home equity loan on a second home
If you’ve worked through this guide and determined a HELOC isn’t right for you, we’ve researched other options to finance your upcoming projects.
HELOC or home equity loan on primary home
If you have sufficient LTV on your primary home, you may be able to take out additional credit against your primary home.
This is true even if the purpose of the loan is repairs or renovation on your second home. Interest rates are often lower with loans on your primary residence, so this may be preferable.
Personal loans are unsecured installment debt. They work best for goals such as paying credit card debt, starting a business, or covering emergencies.
Refinancing your second home could mean a lower interest rate if your credit score has jumped since you bought it. This lengthy process pays off your old mortgage with a new one.
During this process, you can request cash from the new loan, which is added to your mortgage. Many lenders will allow you to borrow up to 80% of your home’s value during a cash-out refinance.
A loan from family
If you ask a family member you trust to loan you the money to accomplish your goal, you can sign a contract with them laying out the terms of your loan and when you expect to repay it.
0% introductory APR credit cards
Many credit cards offer 0% APR on purchases for a limited time. This might be an appealing option if it’s feasible to pay off your purchase within 12 to 18 months.
Be cautious because the APR after the introductory period is often high.