Can You Use a Home Equity Loan or HELOC for a Down Payment?

If you’re considering buying a home, a crucial step is to determine how you’ll come up with the down payment. If you already own a home, you have two options worth considering: a home equity loan and a home equity line of credit (HELOC). 

Both are based on your home’s equity, but a home equity loan requires you to borrow a lump sum and often comes with a fixed interest rate and repayment timeline. A HELOC is a revolving line of credit you can access as needed. Most HELOCs have variable interest rates. 

We’ve researched whether you can use a home equity loan or HELOC as a down payment for your next home and the pros and cons of doing so.

Can I use a HELOC or home equity loan as a down payment on a new home?

This depends on the borrower’s plans. 

If you plan to use the proceeds from the sale of your current home to purchase a new home, a home equity loan or HELOC is not an option for a down payment. 

If you stay in your current home, you may use a HELOC or home equity loan as a down payment.

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

The ideal scenario for when you can use a HELOC or home equity loan for a down payment is when you’re looking to buy another home in addition to your primary residence. Typically, this falls into two scenarios: 

1. You plan to purchase a new home as an investment property. You can tap into the equity of your current home to use it as a down payment on the purchase of the new property.
2. You’re looking to purchase a new home as a vacation home. You can access your current home’s equity.

Among several factors, the loan or credit line you’ll get depends on the equity you have in your current home and the lender’s requirements. You will often need sufficient equity in your current home to cover at least 20% of the cost of the new home.

Using a home equity loan as down payment

With a home equity loan, you get a lump sum you can use for almost anything, including a down payment. 

Many lenders will allow borrowers to take out a home equity loan for up to 85% of their home’s value minus what they owe on the mortgage. 

Current property value	Mortgage balance	Borrower’s equity
$200,000	$150,000	$50,000

In the example scenario above, the maximum you could borrow is $20,000 (85% of the $200,000 home value, minus the mortgage balance of $150,000). You could use this amount for the down payment, or part of the down payment, on a new property.

Now, this isn’t a last-minute type of loan. Getting a home equity loan can be lengthy, and you may have to pay for an appraisal and other fees. So prepare ahead of time if you plan to make a home equity loan your down payment option. 

Using a HELOC as down payment

A HELOC might be a better option for borrowers who need to make smaller down payments. Since it’s a credit line, you may not be able to borrow as much as with a lump-sum loan.

HELOCs are similar to credit cards because you can spend up to your limit, pay it down, and use it again for other projects, such as renovations. 

For example:

• Imagine you’re looking to buy a home for $200,000.
• A typical down payment for this type of purchase is 20%, or $40,000.
• If you had enough equity in your home to qualify for a HELOC with a $50,000 limit, you could borrow the full amount you need to cover the down payment. 

But a HELOC isn’t the fastest option. Personal savings or borrowing from your retirement accounts can mean quicker. Like a home equity loan, you’ll likely need an appraisal so the lender can determine the exact home value and your equity. 

Pros and cons of using a home equity loan or HELOC as down payment

Pros

• Affordable interest rates

  HELOCs and home equity loans often have more affordable interest rates than personal loans and other loans many borrowers consider for down payment assistance. 

• With HELOCs, repay only what you use

  HELOCs are a line of credit, so you’ll only pay interest on what you use, not a lump sum. 

• Borrow up to 80% of your home’s equity

  HELOCs and home equity loans can provide substantial down payments since you can often take out a loan that’s up to 80% of your home’s equity, sometimes more. 

• Many uses

  You can use them for a down payment, but home equity loans and HELOCs have many uses. For example, you can use one to fix up your home or buy furniture. Borrowers like HELOCs and home equity loans because they offer flexibility.

Cons

• Your home acts as collateral

  HELOCs and home equity loans pose a danger because if you default, your home is the collateral. Lenders or collections companies can seize and sell your home to compensate for their loss. 

• You might pay fees

  Certain HELOCs and home equity loans come with closing costs between 2% and 5%. 

• Most HELOCs come with variable rates

  Home equity loans often come with fixed rates, which can be helpful because they won’t change. Variable rates, while often lower than fixed rates, are subject to change depending on the state of the market and interest rates. Many HELOCs include variable rates. 

• Manage several payments

  If you use a HELOC to make a down payment, you might keep your original home and take on a new mortgage with the new property. You’ll also make payments on the HELOC or home equity loan. That could be three payments each month if you’re paying on your current home. 

Is it a good idea to use a HELOC or home equity loan as a down payment?

The decision depends on factors such as how much money you need for the down payment, how long you plan on using the loan, and your credit history. 

Before you consider these options, be aware of the risks. A HELOC or home equity loan as a down payment can be risky because it requires extra debt. You risk losing your home if you can’t keep up with the payments. 

If you’re confident using your equity as a down payment option is correct for you, consider the two options. Here are some scenarios in which you might choose one over the other.

Consider a HELOC if you:	Consider a home equity loan if you:
Want flexible borrowing and repayment options	Need a specific lump sum upfront
Are comfortable with variable interest rates	Prefer fixed monthly payments and interest rates
Might need to access funds over time	Have one-time need for funds and know the exact amount
Are looking for a longer draw period	Aim for a quicker repayment without future borrowing

When to use a HELOC

The benefits of a HELOC are the ability to borrow a specific line of credit up to a maximum amount and flexible repayment. 

This can help if you’re unsure of the exact amount you’ll need. A HELOC often allows you to draw from the line of credit for up to 20 years, so you can make payments over a longer time. 

For a general sense of whom a HELOC will work best for, consider the following situations where this may be a favorable down payment option:

• You need flexible payment options.
• You don’t need a lump sum upfront.
• You only need to borrow on an as-needed basis.
• You can lock in low interest rates with your good credit score. 

When to use a home equity loan

The benefit of a home equity loan is the ability to lock in a fixed interest rate and know what you’ll owe each month. Not worrying about rate hikes can provide peace of mind. Many home equity loans have shorter repayment periods than HELOCs—10 to 20 years—which allow you to pay off the loan faster. 

Consider the following situations in which a home equity loan may be the better down payment option:

• You need a large amount of money upfront.
• You want your interest rate to stay the same. 
• You won’t need to borrow against your equity in the near future.
• You have a clear idea of how much you need to borrow.

Alternatives to a home equity loan or HELOC for down payment

Homebuyers have several options for down payment assistance that don’t include a home equity loan or HELOC—and don’t require you to put up your house as collateral. 

Alternatives include:

• Personal savings: One of the most common, and simplest, ways to fund a down payment is by saving. If you can live below your means and start saving early, you can put your money to work and get a healthy start on your down payment, taking on less debt. 
• Retirement funds: If you’ve been saving for retirement, consider a loan from a retirement account such as an IRA or 401(k). This can have lasting repercussions for your retirement savings, but many borrowers take advantage of this option. 
• Investments: You may be able to use profits from your investments to fund your down payment. 
• Gift funds: A financial gift from family or friends can be a terrific way to help fund a down payment. Many lenders accept gift funds, and the donor can provide a gift letter confirming it isn’t a loan. 
• Grants and other assistance programs: Many state and local governments offer assistance programs to help first-time homebuyers with down payments.