Homeowners needing fast access to cash to buy another property can use a home equity line of credit.
A home equity line of credit (HELOC) can be used for multiple purposes, but can you use a HELOC to buy a house? Whether it’s an investment property or a vacation home, homeowners may be able to use the equity in their primary residence to put a down payment on a second one.
“If you have a lot of equity in your current residence and want to leverage it for another purchase, then you can certainly use the proceeds from a HELOC for the purchase,” says Sarah DeFlorio, vice president of Mortgage Banking at William Raveis Mortgage.
Just because you can doesn’t mean you should. Here, we’ll walk you through how to use a HELOC to buy a house, who may benefit from the strategy and who should consider alternatives.
Using a HELOC to Buy a House
A HELOC or home equity line of credit, allows homeowners to tap into their home’s equity to access a revolving line of credit that can be used for any reason, including buying a second home. The challenge, however, is having enough equity in your home to fund a down payment or outright purchase.
Your equity is the value of the home minus the outstanding loan balance. Depending on the HELOC lender, you’ll most likely be approved for up to 80% of your equity.
So, getting a HELOC large enough to cover a second home purchase is technically possible. That said, you’ll have to make small payments on the money you withdraw even before the draw period or when you can withdraw from the HELOC, closes.
“You will want to make sure you have a plan in place to pay down the balance of the HELOC before the 10-year period ends and the payments jump up significantly as it moves to amortize for the last 20 years to pay off the balance,” DeFlorio says.
Who Should Use a HELOC to Buy a House
To be honest, only two groups of people should use a HELOC to buy a house: those who receive large annual bonuses and people with commission-based income. “They can earmark those funds toward paying down the balance over time,” DeFlorio says.
Tim Gordon, a San Diego-based real estate investor, says using HELOCs to buy a house is only advisable if you’re sure it will be a good investment. “The stakes get greater with variable interest rates, not to mention leveraging too heavily against an asset,” he says. “It is all about balancing opportunity with financial prudence.”
Who Should Choose an Alternative to a HELOC
Most homeowners looking to buy a second property should look to HELOC alternatives to fund their purchase. Here are a few options to consider.
Home Equity Loan
A home-equity loan (HEL) could be a good option if you still want to leverage your equity. For one, you get a lump sum of cash instead of a revolving line of credit. Also, the interest rate is fixed, so you’ll receive consistent monthly payments.
With a HELOC, interest rates vary, so your monthly payments fluctuate.
Cash-Out Refinancing
Homeowners who want to maintain only one mortgage can opt for cash-out refinancing. With this method, you must get a larger loan to pay off your existing mortgage and the cash you need for the down payment.
Cash-out refinancing allows you to consolidate your debt. You can also use the cash received from refinancing however you want. When done correctly, you can also get a lower interest rate on your mortgage, though your monthly payments may increase.
Personal Loans
If you’re buying a tiny home, a mobile home or a cheaper property, getting a personal loan is also an option. Most personal loans range from $2,000 to $100,000. With this amount, you should have the funds to pay a small mortgage's down payment. Since you are not using the property as collateral, you won’t lose the house even if you default on the loan.
What to Know About Using a HELOC to Buy a House
- A HELOC provides a flexible payment structure to help you buy a house at lower interest rates.
- To obtain a HELOC, homeowners should meet requirements such as having at least 15% home equity and a good credit score.
- Make sure you have a plan to repay the loan.
- Shop for top lenders and compare other financing options, such as home equity loans and cash-out refinancing, to find the most cost-effective way to purchase a new property.
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his coverage of the New York City economy. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.
For this story, we worked with Sarah DeFlorio, vice president of Mortgage Banking at William Raveis Mortgage, a Northeast-based mortgage lender and broker.
Frequently Asked Questions
Can you use a HELOC to buy a rental property?
Yes, you can use a HELOC for anything, including purchasing a rental property.
How long does it take to get a HELOC to buy a house?
HELOC approval can take two to eight weeks after filing a complete application. Once approved, you can draw the funds you need to purchase your second home.
What happens if you can't repay a HELOC used to buy a house?
If you default on HELOC payments, your property may be foreclosed.
Sources
- Sarah DeFlorio, vice president of Mortgage Banking at William Raveis Mortgage
- Tim Gordon, real estate investor and financial expert at Gordon Buys Homes
About Anthony O'Reilly
Anthony O’Reilly is an updates editor for Benzinga. He’s won numerous journalism awards for his coverage of the New York City economy and Long Island school district budgets.