Key takeaways
- You can use home equity to help fund the down payment, closing costs or even the full purchase price of a second home, typically through a home equity loan or a HELOC.
- To qualify for one of these products, you’ll generally need quite a bit of equity, enough to maintain the 15% to 20% cushion most lenders require after your homebuying expenses. You’ll also need strong credit — often 680 or higher — stable income, manageable debt and enough cash reserves to support two properties.
- Buying a home with your equity can make you a more competitive buyer, but your primary residence will be at risk if you can’t afford the payments.
Tapping into your home equity can be a financially savvy shortcut to buying a second home without having to save another down payment from scratch or draining your savings. However, it also raises the stakes for your personal finances. Since your primary home acts as collateral — and you can lose it if you fail to make payments — the decision is less about if you can use home equity funding toward a second home and more about whether the monthly costs, interest rates and long-term risk feel comfortable for you.
Using home equity for down payments
Given today’s high home prices, coming up with down-payment cash is a big sticking point for would-be buyers. But if you’re already a homeowner, using your home equity toward homebuying costs can have some major advantages. It may allow you to make a larger down payment — avoiding private mortgage insurance (PMI) — or even make an all-cash offer.
$95,427
The median down payment a repeat buyer made for a U.S. home in Q4 of 2025 was 23% of the median sales price ($414,900).
Source:
National Association of Realtors
One catch: Not all lenders allow borrowers to use home equity funds for a down payment if they’re also taking out a mortgage on the new property. While there’s no industrywide rule against it, lenders want to make sure your debt-to-income (DTI) ratio reflects any new debt tied to a HELOC or home equity loan, says Matt Dunbar, chief strategic growth officer for InterLinc Mortgage.
“The critical aspect for lenders when evaluating such scenarios is ensuring the borrower’s debt-to-income (DTI) ratio accurately reflects all financial obligations,” he says.
If your loan contract allows it, Dunbar recommends getting and depositing the home equity money well before your mortgage application, to give the funds time to season — and for your credit report to reflect the debt.
It’s also worth looking beyond banks and credit unions for financing. “Stand-alone mortgage companies will allow HELOC funds to be used for a second home or an investment property,” says Jay Garvens, head of the Colorado Springs-based Garvens Group of Churchill Mortgage.
How to use home equity to buy another home
If you’d like to tap your home equity to purchase a second home, you’ve got several options. The two most common are a home equity loan and a HELOC.
While there are similarities between these two products — for example, they’re both second mortgages that require you to put your house up as collateral — there are also important differences. Here’s how each one works.
| Characteristics | Home equity loans | HELOCs |
| Distribution of funds | One lump sum | A line of credit that you can draw from over time, up to a maximum amount |
| Interest rate | Fixed interest rate over the lifetime of the loan | Typically a variable interest rate that rises or falls based on the prime rate, but some lenders offer fixed-rate draws |
| Amount you can borrow | 80-85% of equity stake | 80-95% of equity stake |
| Loan repayment | Immediately begin paying both principal and interest in monthly installments over the term, which can be up to 30 years | During the first 5-10 years (the draw period), you may pay only interest. For the next 10-20 years (the repayment period), you’ll repay the principal and the remaining interest. |
Requirements for home equity financing
Qualifying for a HELOC or a home equity loan can be more challenging than qualifying for your original mortgage. That’s because, along with your HELOC or home equity loan, you’re likely to still have your mortgage in place. The more debt you take on, the more sure your lender wants to be that they’ll be repaid.
While specific requirements vary by lender, you’ll generally need to meet these four benchmarks:
- At least 15% to 20% equity: Lenders generally require a maximum combined loan-to-value (CLTV) ratio of 80% to 85%. This means the total of your current mortgage plus your new home equity loan cannot exceed 85% of your home’s appraised value.
- A credit score of 680 or higher: You can qualify for home equity products with a score as low as 620, but many lenders require at least 680. For the best rates, you’ll need a score of 700 or higher.
- A DTI ratio below 43%: Your debt-to-income (DTI) ratio is the percentage of your gross monthly income that goes toward debt payments. The lender will factor in your primary mortgage payment and your home equity payment, along with your other debts.
- Documented, stable income: You’ll need to provide at least two years of tax returns, W-2s and recent pay stubs to prove you have the cash flow to sustain multiple property debts.
What are the pros and cons of using home equity to buy another house?
Not sure whether you should use your equity to purchase a second home? Here are the advantages and the drawbacks.
Advantages of using home equity
- You won’t have to touch your savings. By taking out a home equity loan or a HELOC, you can get the cash you need to buy another home without depleting your bank or investment account.
- You can keep your current mortgage. If you have an ultra low-interest-rate mortgage, a home equity loan or HELOC leaves it intact.
- You’ll be a more competitive buyer. With the funds from your home equity loan, you can make a larger down payment on a new home — or even buy it outright. That could make you more attractive to sellers.
- You can potentially borrow at a lower cost. Home equity loans and HELOCs are secured by your property. As a result, they tend to have lower interest rates than unsecured loans, like personal loans. Your exact interest rate will depend on your financial profile and lender, of course.
- You’ll have a long time to repay. Home equity loans and HELOCs generally have long repayment periods, often up to 30 years.
Disadvantages of using home equity
- You could lose your home. Your primary residence serves as collateral for your home equity loan or HELOC. If you can’t repay it, your lender could take your house.
- You’re trading in hard-earned equity for more debt. In addition to your existing mortgage, you’ll also be responsible for the home equity loan or HELOC, as well as any mortgage on your new property.
- You might end up underwater. If you give up a big chunk of your equity and property values decline, you could end up owing more on your home than it’s worth, especially if you have multiple home-secured loans. As a result, you’d go into negative equity – otherwise known as being underwater on your mortgage.
- You’re on the hook for closing costs. Like primary mortgages, home equity loans and HELOCs come with closing costs. On average, these costs range from 2 to 5 percent of your total loan amount; sometimes, they’re closer to 1 percent. Still, it’s an additional expense.
- You might pay more interest. While cheaper than unsecured debt, second mortgages carry higher interest rates than primary mortgages and refinances. You will probably also lose some tax advantages (see below).
Tax breaks on home equity loans
If you use the money from your HELOC or home equity loan to purchase a second home, you’ll lose out on one fundamental plus of home equity financing: the ability to deduct the loan interest come tax time.
The IRS stipulates that for the interest to be deductible, the loan must be used to buy, build or substantially improve the residence that secures the loan. That means enhancing your current home — not acquiring a new one.
There’s one way the tax break might still apply with a second-home purchase, says Dennis Shirshikov, founder of GrowthLimit.com and adjunct professor of economics at the City University of New York: “Buying adjacent land or property can be considered part of this [home enhancement], especially if it’s demonstrable that such an acquisition improves or complements the value or utility of the main residence.”
For example, you use home equity funds to acquire some wooded acres behind your place to clear and build a little guest house; or you could buy the house next door and connect it to your residence. Shirshikov recalls a case where a homeowner used a home equity loan to purchase a vacant lot adjacent to their primary home. “The rationale was that this purchase prevented a potentially obstructive development on that land, thereby preserving the home’s view and value,” he says. “The IRS accepted this as a substantial improvement to the residence.”
Even without a tax break, a home equity loan or HELOC could provide handy funds to fix up and run a second place. Home maintenance requires a considerable outlay these days, averaging over $8,800 a year, according to Bankrate’s Hidden Costs of Homeownership Study. People often overlook these routine repair and upkeep expenses when budgeting to buy a home – and perhaps that’s why Bankrate’s 2025 Homeowner Regrets Survey found that those with regrets about their home purchase most commonly named maintenance and other hidden costs. Specifically, 42 percent of them cited these costs as being more expensive than they anticipated.
Should you use a home equity loan to buy an investment property?
You can also use equity to purchase an investment property: real estate you’re going to sell or rent out for income.
The biggest benefit: If you’ve built up a lot of equity, your home equity loan or HELOC lets you access a large amount of money. That’s important when buying investment properties, which have stricter eligibility criteria than second homes and typically require a 15 to 25 percent down payment.
At the same time, there are risks involved in using equity to finance an investment property. Ideally, your new property will generate consistent income via its rents or leases to help you repay your home equity loan or HELOC on time – but, unfortunately, that’s not guaranteed.
Let’s say you remodel your new investment property with the intent to sell it for a profit. What happens if you can’t attract a qualified buyer? Or, what if you put a house on the rental market but struggle to find a reliable tenant? In either case, you’ll still be responsible for paying back what you’ve borrowed – and if you can’t afford it, you could lose your property.
Before tapping into your home equity, consider running the numbers with a home equity loan calculator to estimate costs and compare borrowing scenarios.
Alternatives to using a home equity loan to buy a second property
Home equity loans and HELOCs are a popular financing tool these days – but they aren’t your only option.
“The housing boom means many American homeowners have accumulated significant equity in their primary residences,” says Jeff Ostrowski, housing market analyst and writer at Bankrate. “Borrowing from that equity to buy a second home might make sense, but keep in mind the risks. Home equity loans and HELOCs have higher borrowing costs than mortgages, and your primary home is on the line should you default.”
If you do think twice before tapping it, alternatives do exist. Some of these options offer funding for most of the purchase; others may cover the upfront expenses. They include:
- New mortgage: If you take out a separate mortgage for your new house, you can deduct the mortgage interest if you itemize your taxes — up to the IRS limit for mortgage debt. Of course, you’ll need enough cash on hand to cover the down payment.
- Retirement savings: You might be able to put as much as $50,000 toward a second home by taking out a loan from your 401(k) plan, assuming your plan offers the option. You’ll have five years to repay it — less if you leave your job — without penalties or paying taxes.
- Personal loans: If you can find a lender that will let you use a personal loan toward a house purchase, you can typically borrow as much as $50,000 — not as much as with a HELOC or home equity loan, but enough to pad some of your own savings. However, personal loans tend to have higher interest rates than home equity products.
- Cash-out refinance: When you take out a cash-out refinance, you’ll replace your current mortgage with a bigger one. The new loan will include your remaining mortgage balance, as well as a portion of the equity you’ve built over the years — which you receive in a cash payout to use immediately.
FAQ
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There’s no set length of time, but you’ll need to repay the balance on your home equity loan when you close. Ideally, you’ll earn enough money from the sale to pay off the remainder of your loan, as well as whatever’s left on your primary mortgage. However, if the proceeds won’t be enough to settle these debts, you may want to hold off on selling until you increase your equity stake, so the money from the sale can fully cover your loan balance.
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Your home equity is essentially your property’s value minus the mortgage on it. So, to calculate it, simply subtract your outstanding balance from your home’s current market worth. Bear in mind, though, that you can’t borrow the entire amount of your equity. Lenders usually require you keep at least 15 or 20% of it untouched, to ensure you don’t end up owing more on your home than what it’s worth.
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It depends on your plans and goals for the new place. If you only need a certain amount of money for a down payment and prefer a predictable schedule of fixed repayments, a home equity loan is a better bet.
On the other hand, maybe you want to renovate the property within the next couple of years, but you aren’t sure how much it’ll cost. In that case, you might take out a HELOC to both buy and fix up your second home, since it lets you withdraw money on an ongoing basis as needed.
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