Can I Use a Home Equity Loan to Buy Another House?

You might consider buying a second home for a family vacation property, a short-term rental income, to fix and flip, or a long-term investment rental. In some cases, you may even be able to use a home equity loan to buy another home.

Tapping into your current home’s equity to purchase another house is possible for qualified borrowers, but first, consider several factors. Here’s a look at whether you can use your current home’s equity, what this process entails, and whether it’s the right move for you.

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

Yes. You can use two types of loans can be used to tap into your primary home’s equity, which is how much of the property you own compared to what you still owe on your mortgage loan:

1. A home equity loan is a single disbursement loan—similar to a personal loan—secured by the equity in your property. You get your funds in one lump sum and repay in installments. 
2. A HELOC is a line of credit against the equity in your property that you draw against like a credit card. You can make multiple withdrawals up to your credit limit throughout your draw period, with minimal monthly payments. Full repayment begins at the end of the draw period, and monthly payments are based on how much you borrow.

There are no regulations on how the funds are used. As long as you meet the requirements of the home equity loan or HELOC lender, you can use these funds toward the purchase of another house. 

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Tip

Most mortgage lenders need to know the source of your down payment funds when you buy a new property, and you could be denied if the mortgage lender doesn’t allow using borrowed funds for a down payment (assuming the home equity loan or HELOC doesn’t cover the full purchase price of the second home).

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Where can I find a lender that offers a home equity loan or HELOC to buy a second home?

Several lenders offer HELOCs and home equity loans you can use to buy a second property. Here are a few of our top picks and what they offer. 

Figure

Best Overall

4.9 _/5

LendEDU Rating

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Why we picked Figure

Figure is a home equity lender that offers fixed-rate HELOCs. It provides home equity funding in all states except Hawaii, Kentucky, Maryland, New York, Texas, and West Virginia.

Figure has a brief online application process, no closing costs, and no appraisal. Funds arrive in as little as five days. If you’re buying an investment property, you’ll need a minimum credit score of 680; if it’s a primary home, the minimum credit score requirement is 640 in most states.

Rates (APR)	4.24% – 12.25% fixed
Origination fee	0% – 4.99%
Loan amounts	$20,000 – $400,000
Repayment terms	5, 10, 15, or 30 years

What to keep in mind

• Flexible terms, redraw up to 100%, borrow up to $400,000
• 100% digital app & online appraisal
• Check your rate without hurting your credit

• Must draw 100% of your credit line (minus fees) at closing

Bethpage FCU

Best Credit Union

4.7 _/5

LendEDU Rating

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Why we picked Bethpage

Bethpage Federal Credit Union is an excellent option for borrowers with VantageScores of 720 due to its low 12-month introductory rate offer. It’s available in all 50 states and Washington, D.C.

Qualified borrowers can get a Bethpage HELOC for primary homes, second homes, or condos. Bethpage doesn’t assess application, origination, or appraisal fees; you won’t need to pay closing costs on your HELOC. It offers the option to convert part of your credit line to a fixed rate.

Rates (APR)	12-month introductory rate starting at 6.99% for VantageScores of 720 and up, with variable post-introductory rates starting at 8.50%
Origination fee	None
Loan amounts	$10,000 – $1 million
Repayment terms	20 years

What to keep in mind

• 12-month fixed introductory rate for qualified borrowers
• $0 application, origination, and appraisal fees
• $0 closing costs
• Convert some or all of your HELOC into a fixed-rate loan at no cost

• Doesn’t offer a soft credit check to view rates
• Closing can take 6 – 10 weeks, on average

LendingTree

Best Marketplace

4.5 _/5

LendEDU Rating

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Why we picked LendingTree

LendingTree is a marketplace that allows you to check your rates with several companies at once with a soft credit check, which doesn’t affect your credit score. It’s available in all 50 states and Washington, D.C.

Rates (APR)	Starting at 6.24%
Origination fee	May depend on lender
Loan amounts	Vary by lender
Repayment terms	Vary by lender

What to keep in mind

• Get several quotes with one application
• Excellent customer ratings on Trustpilot
• A+ Better Business Bureau rating

• Quotes are limited to its partner lenders

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Is a home equity loan or a HELOC better for using home equity to purchase a new home?

HELOCs and home equity loans have several advantages and drawbacks. When purchasing a second home with equity funds, you might lean more toward a home equity loan. 

Home equity loans provide funds in a single lump sum with a fixed interest rate. This makes it easier to use that money for a down payment instead of drawing HELOC funds over time. You can also plan for set monthly payments. 

Pros and cons of using home equity to buy another house

As with most other financial dealings, you should consider the pros and cons of financing a second home with a home equity loan. Putting up your property as collateral can be beneficial but comes with high risks.

It’s important for homeowners to take proper considerations before deciding how to finance their second home purchase.

Pros

• Funds for a sizable down payment

  Your home equity can provide an easy way to access funds for a large down payment on a new house. Rather than pulling that money from a savings account, a home equity loan or HELOC can give you a large lump sum from funds you might not otherwise access.

• Competitive and predictable interest rates for home equity loans

  Because home equity loans and HELOCs use your property’s equity as collateral, they are secured loans. This presents less risk to the lender, so they can offer better loan terms to borrowers, such as lower interest rates. This can save you significant money over the life of the loan.

• Diversify your assets

  Adding real estate to your portfolio can help hedge against inflation and grow your assets over time. Adding a home equity loan to your real estate portfolio can be a wise option.

Cons

• Defaulting on the loan may cause you to lose both houses

  If you can’t pay as agreed, your lenders could foreclose on your new home or the original home you’re borrowing against.

• Variable interest rates are unpredictable

  A HELOC is a line of credit with a variable interest rate, meaning the rate can increase or decrease. After you borrow against a HELOC, your monthly payment can increase (or decrease) if your interest rate shifts.

• Home equity loan funds may not be tax-deductible

  Using HELOC or home equity loan funds to purchase a new property generally means you can’t take a tax deduction for the interest payments. The interest could be tax-deductible if you use the funds to renovate the property that secures the loan (the primary residence).

• Could end up with 3 loans on 2 homes

  Unless your home equity loan or HELOC is enough to pay for your new property, you’ll also need a mortgage to cover the remaining purchase price. You could need three home loans on two properties: your first home’s mortgage, your home equity loan or HELOC, and a second mortgage.

How do I know if I can borrow enough to afford the house?

Homeowners need to consider the equity they have in their current property before deciding whether they can afford to buy a second home by borrowing against that equity. This also means considering each lender’s requirements around LTV (loan-to-value) and CLTV (combined loan-to-value) ratios.

Your property’s LTV is the ratio of how much you owe on your mortgage compared to what the property is worth. For instance, if you owe $200,000 on a property with a market value of $300,000, your LTV is 66.6% (200,000 / 300,000). This means you have $100,000 in total equity.

Lenders won’t let you borrow all your equity. If your home equity lender allows a maximum CLTV of 85%, you can borrow up to $55,000 of that equity. Between your original mortgage loan balance and your new home equity loan, you will have a combined loan-to-value ratio of 85% (200,000 + 55,000 = 255,000 / 300,000 = 0.85) on the property. 

In this scenario, assuming you want to make a 20% down payment on your new home, you could use that home equity loan to purchase a house worth about $275,000. 

How to use equity to buy another property

1. Determine how much you want to borrow and what you can afford. As we mentioned, you must determine how much equity you have in your home, how much a lender will let you borrow, and how much that means you can spend on your new home.
2. Get ready to apply. Your potential lender will consider the equity available in your home and your individual financial situation. It will also look at factors such as your credit history, income, and whether the property is a vacation or investment home to qualify you for a home equity loan.
3. Compare lenders and rates. To ensure you get the lowest possible interest rates and most competitive loan terms, shop around before committing to a lender. You don’t need to use your current bank or mortgage lender, so feel free to get quotes from multiple financial institutions first.
4. Choose the most attractive offer or lender, and apply. After comparing multiple lenders and home equity loan offers, select the best one and apply. Each lender will have unique requirements, so consult with them to see the documentation you must provide to finalize the loan.
5. Get the funds, and purchase your new home. Once you’re approved and have submitted your paperwork, you can close on your loan. Ask your lender how fast you can get the funds from your equity loan so you can time the purchase of your next home.

If I want the second home to be an investment property, is there a difference?

Using your current home’s equity to buy a second home shouldn’t be an issue whether you plan to use the property as a second residence, vacation property, or rental home. Most lenders won’t dictate what you can do with the funds.

Buying a second home to turn it into an investment property can be beneficial. Rent collections on an investment home or vacation property can help cover the payments on your home equity loan. 

What are the tax benefits for using a home equity loan or HELOC to purchase a home?

You can get tax deductions for the interest paid on a primary home’s mortgage loan and the interest paid on a home equity loan you use to improve that property. However, no tax benefits exist for using home equity to purchase a second home.

Is there a difference between using the funds for a down payment or to pay for the whole house?

A home equity loan or HELOC can be used to make a down payment on a new home or purchase the whole house outright. What you can do depends on how much equity you have in your current home and how much you qualify to borrow from a home equity lender. 

If you can’t borrow enough to fund your second house purchase in full, you will likely need to secure a mortgage for that property to complete the transaction. You will have two additional monthly payments for that property: your new mortgage and your home equity loan or HELOC. 

If you take out a new mortgage loan, not all lenders will allow you to make your down payment with borrowed funds. Check beforehand to ensure your potential lender is willing to accept a down payment of home equity loan funds.

Should I consider alternative sources of financing?

Though they are a convenient way to access an unused asset, home equity loans aren’t the only way to pay for a second home. It can often be more difficult to secure a HELOC or home equity loan for this purpose compared to other financing options. 

Here are alternatives you might want to consider:

• Personal loans—If you qualify, a personal loan can give you access to tens of thousands of dollars (up to $100,000 from our top personal loan lenders) in unsecured funds. These loans don’t require collateral, so the lender wouldn’t seize your property immediately if couldn’t make your monthly payments.
• Retirement funds—You can use retirement accounts for real estate investments. But be careful. Early withdrawals are subject to ordinary income taxes and penalties. Loans against your retirement accounts aren’t penalized, but you won’t earn growth potential on those funds until they are repaid with interest. We recommend consulting with a financial professional to assist with this decision.
• Cash-out refinancing—A cash-out refinance can help you access the equity in your home while refinancing your current mortgage loan. If you want to pull out cash and have the opportunity to adjust your mortgage loan terms, these can be worth a look.

What’s the biggest risk to using a home equity loan to buy a new house?

Since a HELOC or home equity loan is secured by the equity in your first home, defaulting on that loan or missing payments could put your property at risk of foreclosure. If you can’t pay as scheduled, you could lose both houses to the bank. Homeowners should consider these risks and their ability to make monthly repayments on the new loans. 

It’s possible to finance a second home with equity in your home, but the risk of losing one or both homes may outweigh the benefits. It could be more difficult to secure a home equity loan for this purchase, or your new lender may not accept borrowed funds for a down payment. 

Applying for a home equity loan can be complex compared to other financial products. Your lender must verify how much you owe, how much you’re eligible to borrow, and how much your property is worth. This process can take days or weeks, leaving you waiting for funds.

Homeowners should take special care to note each important consideration and choose the proper financing method. Failing to do so could be a complex—and expensive—lesson in homebuying.

Recap of best ways to use home equity to buy another property