Using a HELOC to buy a second home

Picture this. You’re enjoying an outing in your favorite weekend getaway town. A for-sale sign in front of a charming little cottage catches your eye. Your heart beats a little faster because you can already imagine yourself spending your weekends and summers here.

You might already be sitting on (or in) the source of your down payment. The home you live in is more than a roof over your head. If you have equity (if your home is worth more than you owe on the mortgage), your home could also be a financial tool that could help you purchase your second home, courtesy of a home equity line of credit (HELOC). 

Here’s what you should know about using a HELOC to buy a second home.

Can you use a HELOC to buy a second home?

Yes, you can use a HELOC to help buy a second home by borrowing against the equity in your primary residence. Many homeowners use a HELOC for a down payment or short-term financing. Approval depends on your equity, income, and credit profile—and your home serves as collateral (security that backs up the loan).

If you’d like to learn more about how HELOCs work, check out our guide to the mechanics of a HELOC.

HELOC vs. other ways to buy a second home

You may have several options to come up with the down payment for a second home. Saving up the money is the safest method; there's no risk when using your own funds. If you need to borrow for your down payment, the risks increase, especially when your home is used as collateral.

For instance, there are several ways to borrow against your home's equity. A HELOC is one option, or try a home equity loan, which is similar to a HELOC, except you get a lump-sum loan instead of a line of credit.  You could also consider a cash-out refinance, where you replace your existing mortgage with a larger one and get cash for your home equity. 

In some cases, you might use a personal loan, which is unsecured—it doesn't need collateral—but the extra risk to the lender means the rates are typically much higher.

Here’s a straightforward comparison of all these options:

HELOC vs. cash-out refinance for a second home

When choosing between a HELOC and cash-out refinance, a HELOC is generally a more flexible way to borrow money. You can draw from a HELOC as needed, and you’re only required to pay interest during the draw period. HELOCs also typically have lower upfront costs. A cash-out refinance could be better if you want fixed monthly payments and a fixed rate.

How people typically use a HELOC to buy a second home

People often use HELOCs to help pay for the down payment on a second home. You could use a HELOC to cover the entire down payment, so you don’t need to access your savings. Or, you could use a HELOC to make a larger down payment and get a smaller mortgage on your second home.

It’s also fairly common to use a HELOC as a bridge loan—a short-term loan that you use to pay for a new home while you sell your old one. The timing doesn’t always line up perfectly with home sales. You may be ready to put in an offer on a home you love before your current home has sold.

With a HELOC, you could pay for a new home in cash. Once your old home sells, you can pay off the original mortgage and the HELOC.

Make sure to compare the cost of paying for a new home with a HELOC and getting a mortgage. HELOCs generally cost less in fees than mortgages, so you could save money overall. But some HELOCs have prepayment penalties, so it’s smart to factor in the total cost with each option before you decide.

When a HELOC makes sense—and when it doesn’t

Here’s when using a HELOC to buy a second home could be a good idea:

• You want to boost your down payment. A larger down payment means a smaller mortgage on your second home. This could significantly reduce your monthly payments and the amount of interest you pay.

• You’re buying a fixer-upper. If you’re planning to remodel your new home, the flexibility of a HELOC makes it extremely useful. You could draw from your HELOC when you need funds to pay contractors.

• You’re looking for an affordable bridge loan. With low upfront fees and open-ended repayment terms, HELOCs can work well for short-term funding needs.

A HELOC might not be the best fit if:

• You need long-term financing. Because most HELOCs have variable rates, they could get more expensive if rates rise. That presents a risk if you plan to pay off a HELOC over 10 years or longer. In that case, you may want to consider fixed-rate alternatives, such as a home equity loan or a cash-out refinance. You could keep the best of both worlds by checking out a fixed-rate HELOC through Achieve Loans.

• You don’t have much in savings. A HELOC can help with a down payment, but if it’s the only way you can finance a second home, you may be overextending yourself. You’ll end up with three home loans: your first mortgage, your second, and your HELOC. Consider saving up money first so you’re in a stronger position and can afford the maintenance that comes with another home.

• You’ll need to max out your home equity. Maxing out a HELOC (borrowing up to the limit) may have a few serious drawbacks. Some lenders charge higher interest rates if you borrow a large portion of your home equity. A high HELOC balance could also hurt your credit. And if your home’s value drops, you may end up underwater on your HELOC.