Can You Get a HELOC for Down Payment on Second Home? A Homeowner’s Guide

Published June 27, 2022

Choosing to HELOC for down payment on second home properties can make sense if you’re financially prepared to invest in a new house. Although a HELOC offers funds like a credit card, it’s important to remind homeowners of the associated risks. If you believe that you’re able to repay a line of credit and avoid possible foreclosure, speak with a lender about using HELOC to buy a second home. A lender may consider a homeowner ready for a HELOC if:

• They’ve built a strong credit score

• They have significant home equity

• They’ve paid down any smaller or lingering debts

Even those familiar with this type of financing may not be inclined to use a HELOC for down payment on second home properties. These borrowers may lean instead toward getting a cash-out refinance, or home equity loan. Take some time to carefully consider all your down payment coverage options.

Investing in a second home should benefit you — not put you at greater risk. If you have any questions, get in touch with one of our mortgage consultants. We will review your financial portfolio and offer our insight for your specific circumstances.

Pros and cons of using a HELOC to buy a second home

While you can technically HELOC for anything, tapping into your first home’s equity to cover a new down payment comes with benefits and risks. Your personal finances and overall financial health indicate whether you’re a good candidate for a HELOC for putting a down payment on a second home. Before you cover a new home’s down payment with borrowed funds, consider the pros and the cons of drawing on your home equity.

Pros

• Cash reserves: You’ll likely retain greater cash reserves if you use a HELOC for a new down payment. You can set aside these reserves for other future goals or emergencies.

• Revolving line of credit: As long as you don’t go beyond your limit, you can repay and reuse your HELOC credit line.

• Repayment: Lenders only require you to make payments on the HELOC funds that you used, plus the interest.

Cons

• Losing your home: Using your home as collateral to get a HELOC for down payment on second home is a risky decision. A lender may foreclose on your original home if you default.

• Interest rates: You may encounter the instability of variable interest rates during the life of your HELOC.

• Higher down payment: You may put forth a higher down payment when using HELOC to buy second home properties. Lenders can request higher down payments to offset any risks.

Taking cash out of your first home’s equity is always a risky decision. Before making moves, take precautions and request a credit report or speak with a mortgage consultant. You’ll want as many assurances as possible if you use a HELOC for down payment on a second home, either now or in a few years. Taking these steps before you get any loan can go a long way in helping you avoid difficult circumstances in the future.

Other ways to make a second home’s down payment

If you’re looking for assistance to make a new down payment, consider all of your possible options. You may find that exploring your loan and non-loan possibilities help to clarify your specific homeowner needs.

• Cash-out refinance: Using a cash-out refi rather than a HELOC to buy second home properties is one option. You can take out another mortgage at a higher value than the existing home loan. Once you pay off the initial loan, you can hold onto the remaining cash through the refinancing method. Then you can put that cash toward your second home’s down payment fee.

• Long-term saving: Focus on saving if you want to avoid putting up your house as collateral with a HELOC for down payment on second home. The long-term option provides homeowners with greater security. You can also speed up your efforts by finding additional work or minimizing debts with high interest rates.

• CHFA loan: If you’re looking for money to assist with a down payment cost, you don’t need to be a first-time homebuyer. Prior homeowners can utilize the Colorado Housing and Financing Authority’s loan programs. A lender may decide that you qualify for a CHFA mortgage if you cannot cover a down payment and have a limited household income. Keep in mind that your debt-to-income ratio generally cannot exceed 50%.

American Financing is an approved and top-producing CHFA lender. If you decide a HELOC for down payment on second home isn’t for you, our mortgage specialists can help you prequalify for other loans. Call (800) 910-4055 or fill out our online application to get started today.

How to prepare for getting a HELOC

Buying a house can take months to finalize. The good news is that you can keep your HELOC at zero balance and only start making payments once you find your second home. Before you finalize getting a loan, prepare for using HELOC to buy second home properties in a few ways.

• Pay down your debts. Unlike other borrowers, you’re not applying for a HELOC to help consolidate your debts. Reducing your debt-to-income ratio early can give you access to better HELOC for down payment on second home terms.

• Know and improve your credit score. Lenders look at your credit score to determine your HELOC interest rate.

• Understand your home’s equity and value. You’ll likely need at least 20% equity in your home before you can secure a HELOC. Keep paying down your mortgage each month and get an appraiser to look at your house.

Buying a second home should not prevent or distract you from making monthly payments on your first home. A qualified lender, like American Financing, can speak with you about any of your long-term goals.

Even if your plans don’t align with using HELOC to buy second home properties, we may suggest using our down payment calculator. You can use it to compare HELOC for down payment on second home options based on your loan amount, interest rate, and term.