Can You Use a HELOC to Buy Another House?

A Home Equity Line of Credit (HELOC) offers a flexible way to access equity from a primary residence. Homeowners often consider this financial tool to leverage their property wealth for various purposes, including purchasing another home. Understanding how a HELOC functions and its applications for real estate acquisition is important for homeowners.

Understanding Home Equity Lines of Credit (HELOCs)

A Home Equity Line of Credit (HELOC) is a revolving line of credit secured by the equity in a primary residence. Unlike a traditional loan that provides a lump sum, a HELOC allows borrowers to draw funds as needed, up to a predetermined credit limit. This limit is established based on a percentage of the home’s appraised value, minus the outstanding balance of the existing mortgage.

HELOCs feature two phases: the draw period and the repayment period. During the draw period, which commonly lasts for 5 to 10 years, borrowers can access funds, often making interest-only payments. Following the draw period, the repayment period begins, generally extending for 10 to 20 years, during which principal and interest payments are required. Interest rates on HELOCs are variable, meaning they can fluctuate with market conditions, often tied to a benchmark index such as the prime rate plus a margin.

Utilizing a HELOC for Another Home Purchase

A HELOC can facilitate the purchase of another property by providing readily accessible funds. One common application involves using the HELOC proceeds for a down payment on a new home. This can be beneficial in competitive real estate markets where quick access to funds allows a buyer to act decisively.

Another way a HELOC can be employed is as a bridge loan. This strategy helps cover immediate costs associated with a new property purchase while awaiting the sale of an existing home or securing long-term financing. If substantial equity is available and the HELOC limit is sufficiently high, it could even fund a full cash purchase, making an offer highly attractive to sellers. The HELOC converts a portion of the homeowner’s illiquid home equity into liquid funds for real estate transactions.

Financial Implications of Using a HELOC for Property Acquisition

Utilizing a HELOC to acquire another property introduces several financial considerations. Drawing on a HELOC converts the equity in the primary residence into debt, increasing financial leverage and creating a lien on the property. The primary residence serves as collateral for both its original mortgage and the HELOC.

Homeowners manage two mortgage-like payments: the existing primary mortgage and the HELOC repayment. The variable interest rate means monthly payments can increase if market interest rates rise, requiring careful budget management. This increased debt burden can also impact a borrower’s debt-to-income (DTI) ratio, a metric lenders use to assess borrowing capacity. A higher DTI ratio may limit a homeowner’s ability to qualify for additional credit or loans in the future.

Other Financing Options for a Second Property

Beyond a HELOC, other financing options exist for purchasing a second property. Conventional second mortgages provide a fixed-rate, lump-sum loan, offering predictable monthly payments. Investment property loans are designed for properties not intended as a primary residence and often come with higher interest rates and stricter qualification criteria.

Cash-out refinancing is another option, where a new, larger mortgage replaces the existing one, allowing the homeowner to take out cash. This differs from a HELOC as it replaces the entire first mortgage rather than adding a second lien. Personal loans or unsecured lines of credit can also be considered, though these generally carry higher interest rates and shorter repayment terms.