How to Use Home Equity to Buy Another House

Need a home away from home or a property to increase your income? Creditworthy homeowners can use home equity loans to purchase secondary homes––whether condos, single-family, or apartment homes––and even investment properties. 

Learn more about the requirements for getting approved and other considerations below.

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

Yes, you can use a home equity loan to buy another house. Many lenders will approve borrowers with sufficient home equity––typically 20%––and who meet other requirements for these fixed-rate loans.

Because you can use a home equity loan for almost anything, there’s no limitation to using your funds on another house. 

Typically, homeowners can apply for a home equity loan for:

• A vacation home
• Passive (rental) income
• Investment (fix-and-flip) 

Borrowers with a credit score above 730 may be more likely to get approved—and with better rates. However, some lenders may offer borrowers with lower credit scores a home equity loan after considering other factors, such as debt-to-income ratio (DTI) and credit history.

Can I use a HELOC to buy another home?

Yes, you can use a home equity line of credit (HELOC) to buy another house. 

What’s the difference? The requirements for a home equity loan and a HELOC are quite similar, but they’re not the same. A HELOC also relies on the equity you have in your home, but it differs from a home equity loan in that you can draw from it as needed—similar to a credit card— and many HELOCs have variable interest rates. 

You can access the funds for five to 10 years. Once you repay what you borrow, that amount becomes available again. With a home equity loan, however, you get a lump sum, so if you use the entire amount, you can’t tap into the funds again.

Read More

Fixed-Rate HELOCs: How They Work and Where to Get One 

Other methods of using home equity to buy a second home

Cash-out refinance

With this method, you’re replacing your current mortgage with a new one. You typically need to have at least 20% equity. Your new loan pays off your current mortgage balance, and you then get cash for whatever is left over. 

Find out more about cash-out refinance and some of the best lenders.

Read More

Cash-Out Refinance vs. Home Equity Loan Comparison 

Reverse mortgage

A reverse mortgage is intended for older homeowners who are generally 62 or older. Each month, the lender will send you payments based on the equity you’ve built in your home. As payments continue, the amount you owe increases. Essentially, you can use the payments you’ve collected over time to buy a second house.

A reverse mortgage isn’t an option for many homeowners, but for those considering it, we’ve identified four of the best reverse mortgage lenders.

Read More

HELOC vs. Reverse Mortgage: Which Is Better? 

How to use home equity to buy another house

Using a home equity loan or a HELOC to buy another house is straightforward:

1. Find out whether you qualify

Because many lenders offer home equity loans and HELOCs to homeowners with at least 20% home equity, first ensure you have enough equity. 

Many lenders have a prequalification tool regarding the amount you wish to borrow. This short step will give you an idea of whether you may qualify for a home equity loan.

2. Research and compare potential lenders

Research online to compare rates and requirements. This will help you narrow down your choice of lenders.

3. Apply

Submitting your application with a reputable lender should only take a few minutes. The lender may require your personal information, including your home address and other details.

4. Get your cash

The approval process will likely include an appraisal. Once that’s complete, it may take time to calculate closing costs. From the date your application is approved to the date you get the funds, it may take upward of 30 days.

Do all lenders allow you to use equity to buy another property? 

Remember: Homeowners must have enough equity in the home they’d like to leverage to qualify for a home equity loan or HELOC. And if your credit history, income history, and DTI all check out, a lender may have other restrictions.

Even with a good FICO credit score of 670 or better, the type of property you can buy may vary by lender. In the lender’s eyes, if you run into financial hardship, you’re more likely to repay your primary mortgage than a home equity loan. That makes these “second mortgages” riskier for lenders.

For taking on greater risk, many lenders tack on higher rates or limit the type of properties their borrowers can use as collateral. For example, many lenders won’t loan funds to purchase investment properties because they come with more risk. 

Before you apply for a home equity loan, we’ll break down the different property types:

• Primary home: The place you primarily reside. This means you live here most of the time.
• Secondary home: A place you intend to spend part of your time living for personal use or enjoyment.
• Investment property: A property for generating income, appreciation, or tax benefits that isn’t your primary residence.

Below, we’ve found the best home equity lenders for various types of properties:

Lender	Product	Eligible properties
Figure	HELOC	Primary and secondary homes
Aven	HELOC	Single-family, condos, and multi-family (excluding mobile homes, recent builds, or recently purchased properties)
Bethpage FCU	HELOC	Primary homes
LendingTree	HELOC and home equity loan	Varies by lender
Hitch	HELOC	Primary, secondary, and investment
Spring EQ	HELOC and home equity loan	Single-family, condos, and multi-family
Navy Federal Credit Union	HELOC and home equity loan	Primary and secondary homes

Before I would advise a client to use home equity to buy a second property, I would encourage them to factor in several items, including their current budget and mortgage payment. 

I also encourage them to consider what could occur: Adding a HELOC or home equity loan and potentially an additional mortgage on a second home will increase expenditures, including property tax, homeowners insurance, moving costs, furnishings, utilities, and potentially a homeowners association fee. 

Be sure you understand these additional costs before pursuing the venture. I don’t think there’s a major difference between a primary home and a second home when making this decision. The exception is an investment property, which you expect to generate income. Therefore, you can factor in the expected income, which should help outweigh the costs and ideally cover the cost of the HELOC or home equity loan payment and additional mortgage if you obtain one.

Erin Kinkade, CFP®

Pros and cons of using home equity to buy another house

Before you take out a home equity loan or HELOC to buy a second home, consider the benefits and risks.

Pros

• Lump-sum payment

  With a one-time cash payment, you’ll be ready with the funds you need for your purchase.

• Lower rates

  These types of loans may come with lower interest rates than personal loans. And with lower interest, you can make more headway paying down the principal, saving money over the life of the loan.

• Flexible repayment term options

  Home equity loans and HELOCs offer repayment terms of up to 30 years. In contrast, the most generous personal loans only offer up to 12 years.

• More buying power

  In a competitive buyer’s market, the higher your down payment, the better your chances are. Using a home equity loan could give you enough for more than a 20% down payment. If your home equity loan is enough to buy the house in cash, even better. Not only will most home sellers accept all-cash offers over any others, but you’ll also avoid the drawn-out closing process and most of the closing fees.

Cons

• Asset becomes debt

  What you own now becomes what you owe once you tap into home equity. If you can’t repay, you run the risk of losing your home.

• Reduces equity

  Leveraging home equity also means less equity at your disposal. If your primary residence needs work or if you have another pressing issue, you may not be able to rely on equity to cover it.

• Budget strain

  A home equity loan or HELOC acts as a second mortgage, which means an added payment. If the list of bills is already long or payments become too much, this could create financial strain.

Relying on home equity to buy another house may be a solid option if you:

• Have significant equity (more than 20% is ideal)
• Are financially stable and comfortable with an added payment
• Can take advantage of lower rates, payments, or other benefits after purchasing the second house

If borrowing from your home equity sounds practical, don’t be too quick with your decision-making. Be sure to explore all your options first, as well as your current financial situation and potential changes. 

Alternatives to home equity for financing a second home

If you’re considering buying a second home but want to explore options beyond using your home equity, here are five alternatives:

Conventional mortgage

A traditional mortgage can be an option if you have a solid credit profile and meet the lender’s requirements for a second home. With this route, you don’t tap into your current home’s equity, which may reduce financial risk. Check out our list of the best mortgage lenders.

Personal loan

A personal loan can provide quick access to funds without using your home as collateral. Interest rates tend ot be higher than for secured loans, but personal loans can work for buyers who need less capital or don’t want to risk their home equity.

Cash savings

Using savings to fund a second property purchase eliminates fees and interest costs, providing more long-term financial flexibility. Many buyers set aside funds specifically for property purchases to avoid debt altogether.

Investment portfolio loan

If you have a sizable investment portfolio, some lenders offer loans against these assets. These loans let you borrow based on your portfolio’s value without selling your investments, which may appeal to those who don’t want to disrupt their portfolio’s growth.

Retirement account loan

For those with 401(k) accounts, some plans allow for loans that you pay back over time. While you’ll need to meet the loan terms, this strategy allows access to funds without immediate taxation. But keep in mind that fees or penalties could apply, especially if you leave your job before repaying the loan.

FAQ

Can you use a home equity loan as a down payment on another home?

Yes, many lenders will allow you to use funds from a home equity loan as a down payment on a second property. This approach may be suitable if you have enough equity and can manage the additional monthly payment. However, it’s essential to ensure you’re comfortable with taking on two loans.

What is the risk of taking a home equity loan to buy another property?

The primary risk is that your current home serves as collateral for the home equity loan. If you can’t keep up with payments, you risk foreclosure on your primary residence. Taking on a second loan could also affect your overall debt-to-income ratio.

Which is better for purchasing a second property—home equity loan or HELOC?

Choosing between a home equity loan and a HELOC depends on your financial goals and repayment preferences. A home equity loan provides a fixed amount with a predictable repayment structure, ideal if you know exactly how much you need. 

A HELOC offers flexible revolving credit, which can be beneficial if your second property requires ongoing expenses or renovations. Both options have advantages, so consider your budget, cash flow, and income stability.