Financial Planning and Analysis

Can You Take Out a Home Equity Loan to Buy Another House?

Explore leveraging your current home's equity to finance the purchase of another property. Understand the possibilities, practicalities, and financial considerations.

Leveraging home equity can be a strategic way to acquire another property without selling your current home. Understanding the financing options and financial implications is important. This article covers home equity financing and how these funds can facilitate purchasing another house.

Understanding Home Equity Financing

Home equity is the portion of a home a homeowner truly owns, calculated as the current market value minus any outstanding mortgage balances. This ownership stake grows as mortgage principal is paid down and property value increases. Homeowners can access this value through home equity loans and Home Equity Lines of Credit (HELOCs).

A home equity loan is a second mortgage providing a lump sum upfront, repaid over a fixed period with a fixed interest rate. This offers predictable monthly payments, suitable for a specific, one-time large expense. Repayment terms typically range from 5 to 30 years.

A HELOC functions like a revolving credit line, similar to a credit card, allowing borrowers to draw funds as needed up to an approved limit. HELOCs usually feature variable interest rates, meaning payments can fluctuate. They typically have a “draw period,” often around 10 years, during which only interest payments may be required, followed by a “repayment period,” commonly 10 to 20 years, where both principal and interest are paid.

To qualify, lenders assess the amount of equity, the borrower’s credit score, and their debt-to-income (DTI) ratio. Lenders typically require at least 15% to 20% equity. A credit score of at least 620 is often needed for favorable terms. The DTI, which compares monthly debt payments to gross monthly income, is also a significant consideration, with many lenders preferring a DTI below 50%.

Using Home Equity Funds for a Down Payment

Funds from a home equity loan or HELOC can be used as a down payment for another property. This strategy allows homeowners to leverage their primary residence’s value to acquire additional real estate. However, when the down payment comes from borrowed funds, the new mortgage lender will carefully scrutinize the source.

Lenders for the new property view down payments sourced from loans differently than those from personal savings. This is because a borrowed down payment increases the borrower’s overall debt burden, impacting their financial stability and ability to manage additional mortgage payments. The new mortgage lender will require full disclosure of the home equity loan or HELOC to understand the applicant’s complete financial picture.

An additional loan, such as a home equity product, directly affects the borrower’s debt-to-income (DTI) ratio for the new mortgage application. The DTI calculation will incorporate the monthly payments of the home equity loan or HELOC, in addition to existing debts and the proposed new mortgage payment. A higher DTI can make it more challenging to qualify for the new mortgage or may result in less favorable loan terms. Lenders typically aim for a DTI ratio below 43% or 50% for mortgage approval, including all existing and new debt obligations.

To mitigate concerns, new mortgage lenders may require specific documentation regarding the home equity funds. This can include statements verifying the lump sum disbursement from a home equity loan or detailed transaction histories for a HELOC. The lender may also ask for a letter explaining the source of the down payment to ensure transparency and assess the borrower’s repayment capacity.

Financial Considerations of Using Home Equity

Utilizing home equity to finance another property introduces several financial considerations. A primary concern is the impact on the overall debt-to-income (DTI) ratio. Taking on a home equity loan or HELOC adds another monthly debt obligation, directly increasing total debt payments relative to income. This elevated DTI can constrain future borrowing capacity, potentially limiting access to other credit.

This strategy creates a “doubling up” on debt, as the homeowner becomes responsible for their original mortgage, home equity payments, and the new mortgage. This significantly increases the monthly payment burden and amplifies financial risk. If property values decline or income streams are interrupted, managing multiple substantial debt obligations can become challenging.

Interest rates associated with home equity products also add to the overall cost of acquiring the new property. While home equity loans often have fixed interest rates, HELOCs typically have variable rates that can increase over time, leading to higher monthly payments. As of August 2025, average fixed home equity loan rates are in the range of 8.25% to 8.41%, and average HELOC rates are around 8.26%.

Furthermore, leveraging home equity reduces the available equity in the original home, increasing the homeowner’s overall loan-to-value (LTV) ratio. This means less equity remains as a financial cushion, which could be problematic if the home’s value decreases, or if there is a need to access equity for unforeseen emergencies. Failing to make payments on the home equity product could result in foreclosure on the original home, jeopardizing both properties.

Other Financing Options for Property Acquisition

While leveraging home equity from a primary residence is an option for acquiring additional property, several other financing avenues are available, each with distinct features.

A cash-out refinance is one alternative, where a homeowner replaces their existing mortgage with a new, larger one, and receives the difference in cash. This approach consolidates the original mortgage and new cash into a single loan, potentially offering a lower interest rate if market conditions are favorable. Unlike a home equity loan, which is a second lien, a cash-out refinance creates a new first mortgage.

Another common method is securing a conventional mortgage specifically for a second home or investment property. These mortgages typically have different requirements than those for primary residences, often involving higher down payment percentages, higher interest rates, and more stringent credit score and debt-to-income ratio criteria. Lenders assess the financial viability of the new property independently, considering its potential rental income for investment properties. This option keeps the financing of the new property separate from the primary residence.

Portfolio loans represent another financing possibility, particularly for unique or non-conforming properties that may not fit standard conventional lending guidelines. These loans are held by the originating lender rather than being sold on the secondary market, allowing for greater flexibility in underwriting criteria. Portfolio loans can be tailored to specific borrower situations or property types, which can be advantageous in certain real estate investment scenarios.

Seller financing, while less common, can also facilitate property acquisition. In this arrangement, the seller of the property acts as the lender, carrying the mortgage themselves rather than the buyer obtaining a loan from a traditional financial institution. This can offer more flexible terms, potentially lower closing costs, and a quicker transaction process. This option is often considered when traditional financing is difficult to obtain or when both parties seek a mutually beneficial alternative.

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