Can I Use Equity in My House as a Deposit?

Home equity is the portion of a home’s value unburdened by mortgage debt, representing the difference between its market value and outstanding loan balances. For example, if a home is valued at $400,000 with a $200,000 mortgage, the homeowner has $200,000 in equity. Equity accumulates through mortgage payments, property appreciation, or a substantial down payment. While not liquid cash, equity can be converted into funds for various financial needs, including deposits for significant purchases.

Understanding Home Equity Access

Homeowners can convert home equity into cash through several mechanisms, each with distinct characteristics for fund disbursement and repayment.

Home Equity Loan (HEL)

This option, often called a second mortgage, provides a lump sum of money upfront, secured by the home. HELs typically have a fixed interest rate and a fixed repayment schedule, meaning monthly payments remain consistent over the loan term, which can range from 5 to 30 years.

Home Equity Line of Credit (HELOC)

Unlike a HEL, a HELOC functions as a revolving line of credit, similar to a credit card. Homeowners can draw funds as needed, up to an approved limit, during a specified “draw period,” commonly lasting 10 years. During this period, borrowers often make interest-only payments. After the draw period, a repayment period begins, typically 10 to 20 years, requiring principal and interest payments, with no new funds drawn. HELOCs generally feature variable interest rates, causing payments to fluctuate, though some lenders offer fixed-rate options for specific draws.

Cash-Out Refinance

This method involves replacing the existing mortgage with a new, larger mortgage. The new loan covers the original mortgage balance plus an additional amount, which is the cash withdrawn from the home’s equity. The homeowner receives this difference as a lump-sum payment at closing. This process refinances the entire original loan balance along with the cashed-out equity, potentially resulting in new loan terms, including a different interest rate and repayment period for the entire mortgage.

Applying Accessed Equity for Deposits

Funds obtained by accessing home equity can serve as a substantial deposit for various purposes, most commonly for another real estate purchase. For instance, the lump sum from a Home Equity Loan or the drawn funds from a HELOC can be directly applied as a down payment on a new primary residence, an investment property, or a vacation home. The ability to use these funds for a down payment can be particularly advantageous for securing a new mortgage, especially for second properties which often have higher down payment requirements, typically 15% to 20% or more.

Lenders for the new purchase will evaluate the borrower’s financial situation. While home equity funds are cash, their origin as a new loan secured by an existing property is a key underwriting factor. Lenders will assess the borrower’s debt-to-income (DTI) ratio, which includes the new equity-based loan payments in addition to existing debts and the proposed new mortgage payment. A high DTI ratio, generally exceeding 43% to 50%, could impact approval or the interest rate offered on the new mortgage.

Beyond real estate, accessed home equity can serve as a deposit for other significant financial commitments, such as business investments or large asset acquisitions requiring a sizable upfront payment. These funds offer flexibility for diverse applications, primarily facilitating large, secured purchases where a significant deposit is needed.

Navigating the Access Process and Repayment

The process of obtaining a home equity loan, HELOC, or cash-out refinance involves several procedural steps. Initially, homeowners typically complete an application, which requires providing extensive documentation such as proof of identity, property details, income verification (e.g., pay stubs, W-2s, tax returns), and permission for a credit check. Lenders will evaluate the applicant’s credit score, often looking for scores in the mid-600s or higher, and assess their debt-to-income ratio.

A key approval step is the home appraisal, which determines the property’s market value. This valuation helps the lender calculate available equity and the maximum loan amount, typically allowing borrowing up to 80% to 90% of the appraised value, minus the existing mortgage. Appraisals may involve in-person inspections or automated models. Once the application and appraisal are complete, the loan enters the underwriting stage, where a loan underwriter reviews all financial information to confirm eligibility and ability to repay.

Upon approval, the closing process involves signing various legal documents, and the funds are then disbursed. For home equity loans and cash-out refinances, the money is typically received as a lump sum. For HELOCs, the credit line becomes available for draws. Closing costs, which can range from 2% to 5% of the loan amount, are often incurred, similar to a primary mortgage.

Repayment obligations vary by equity access type. Home Equity Loans have fixed monthly payments. HELOCs have a dynamic structure, often with interest-only payments during the draw period, followed by principal and interest payments, with variable rates causing payments to change. Cash-out refinances result in a single, larger mortgage payment. All home equity loans are secured by the home; failure to pay can lead to foreclosure.