Yes, you can borrow against your home equity to purchase another property, but the lender will treat it differently than a traditional mortgage

A HELOC (home equity line of credit) is a revolving credit line secured by the equity you have built in your current home. You can draw from it for any purpose, including a down payment or full purchase price on another house. However, lenders have specific rules about how they'll structure the loan, what documentation they'll require, and how much they'll let you borrow based on your current home's value and your debt load.

The mechanics are straightforward: you borrow money against your home's equity, and you repay it on a schedule the lender sets. But using a HELOC to buy a second property carries real risks that a traditional mortgage does not, because you're putting your primary residence on the line as collateral. If you cannot repay the HELOC, the lender can foreclose on your home.

Key Takeaways

  • A HELOC can fund a down payment or the full purchase of another house, but the lender will require proof of income and will factor the HELOC payment into your debt-to-income ratio when deciding how much to lend.
  • Most lenders will not let you borrow more than 80 to 85 percent of your home's current value minus what you still owe on your mortgage, so you need substantial equity built up first.
  • Using a HELOC to buy a second home puts your primary residence at risk if you default, because the lender can foreclose on the house you live in.
  • A traditional second mortgage or a cash-out refinance may be safer or cheaper options depending on your situation, current interest rates, and how much equity you have.

How much you can borrow depends on your home's equity and your debt

Lenders calculate how much you can borrow by looking at your home's current market value, subtracting what you still owe on your primary mortgage, and then lending you a percentage of that remaining equity—usually 80 to 85 percent. If your home is worth $400,000 and you owe $250,000 on your mortgage, you have $150,000 in equity. A lender offering 80 percent would let you borrow up to $120,000 through a HELOC.

But that is the ceiling before the lender looks at your income and existing debts. They will pull your credit report, verify your employment, and calculate your debt-to-income ratio—the percentage of your gross monthly income that goes to debt payments. Most lenders want this ratio to stay below 43 percent. If you already have car loans, student loans, credit card balances, or a mortgage payment on the second property you are buying, those all count. The HELOC payment itself will be added to that calculation, which may reduce how much the lender will actually approve.

You will need recent pay stubs, tax returns (usually the last two years), and bank statements showing you have reserves. Some lenders also want to see that you have maintained the equity in your home—meaning you have not taken out multiple HELOCs or refinanced recently in ways that reduced your equity cushion.

The application and approval timeline

Applying for a HELOC typically takes two to four weeks from start to approval, though some lenders move faster. You will submit an application with the lender (your current mortgage servicer, a bank, or a credit union), and they will order an appraisal of your home to confirm its current value. This appraisal usually costs $300 to $500 and takes one to two weeks.

Once the appraisal comes back, the lender will verify your income and debts, pull your credit report, and make a decision. If approved, you will sign closing documents, which typically happen at a title company or the lender's office. You do not need to close on the second property before the HELOC closes—you can draw the money whenever you need it during the draw period (usually five to ten years), though some lenders require you to draw a minimum amount upfront.

If you are buying the second house on a specific timeline, tell the lender that early. Some will expedite the appraisal or underwriting if you have a closing date. Others cannot move faster than their standard process. Knowing this upfront prevents you from losing the house you want to buy.

Interest rates and repayment terms for a HELOC

HELOC interest rates are usually variable, meaning they move up and down with the prime rate. Your rate will be the prime rate plus a margin the lender sets based on your credit score and equity position. If the prime rate is 8 percent and your margin is 1 percent, your rate is 9 percent. When the prime rate drops, so does your HELOC rate. When it rises, so does yours.

Most HELOCs have a draw period (usually five to ten years) when you can borrow and repay as needed, followed by a repayment period (usually ten to twenty years) when you can no longer draw new money and must repay what you borrowed. During the draw period, you typically pay interest only. During the repayment period, you pay principal and interest. Some lenders offer fixed-rate HELOCs or fixed-rate portions of a HELOC, but these usually carry a higher rate than the variable option.

Because rates are variable, your monthly payment can change. If you borrow $100,000 at 7 percent during the draw period, your interest-only payment is about $583 per month. If rates rise to 9 percent, that payment jumps to $750. This unpredictability makes budgeting harder than a traditional mortgage, where your rate and payment are locked in.

Why a HELOC for a home purchase carries more risk than other options

When you use a HELOC to buy a second house, you are securing the loan with your primary residence. If you fall behind on HELOC payments, the lender can foreclose on the home you live in, not the investment property or second home you bought with the money. This is different from a traditional mortgage on the second property, where the lender's claim is against that property alone.

Additionally, if your home's value drops significantly, you could end up underwater on both your primary mortgage and your HELOC at the same time. If you need to sell your primary home quickly, you may not have enough equity to cover both loans, leaving you responsible for the difference.

Variable interest rates also create risk. If rates rise sharply during the draw period, your monthly payment could become unaffordable. Some borrowers have faced payment shock when their HELOC transitioned from interest-only to principal-and-interest repayment, or when rates spiked unexpectedly.

Alternatives to a HELOC for buying a second home

A traditional second mortgage is a fixed-rate loan secured by your home's equity, similar to a HELOC but with a set payment and rate from day one. You borrow a lump sum and repay it over a fixed term (usually ten to thirty years). The advantage is predictability: your payment never changes. The disadvantage is that you cannot borrow more later if you need it, and closing costs are typically higher than a HELOC.

A cash-out refinance replaces your existing mortgage with a new, larger one and gives you the difference in cash. If you owe $250,000 on a $400,000 home, you could refinance for $320,000 and receive $70,000 in cash. This works well if current interest rates are lower than your existing rate, because refinancing does not cost you money. If rates are higher, the cost of refinancing may outweigh the benefit.

A traditional mortgage on the second property is often the simplest route if you have enough cash for a down payment. Lenders will approve a mortgage on the second home separately from your primary mortgage, and the second property itself serves as collateral. This keeps your primary home out of the equation entirely. The downside is that you need a down payment (usually 10 to 20 percent) upfront, whereas a HELOC or cash-out refinance can fund the full purchase.

What documents you will need to provide

Lenders will ask for proof of income (recent pay stubs and tax returns from the last two years), bank and investment statements showing reserves, a list of your current debts with account numbers and balances, and authorization to pull your credit report. If you are self-employed, expect to provide profit-and-loss statements and possibly a letter from your accountant.

You will also need to authorize the appraisal of your primary home. Some lenders will ask for a copy of your current mortgage statement to verify what you owe. If you have changed jobs recently, the lender may ask for an employment verification letter from your employer.

For the second property purchase itself, you will need a purchase agreement or letter of intent showing the address and purchase price. The lender will not fund the HELOC until they understand how the money will be used and can confirm you have the income to support both the HELOC payment and any new mortgage on the second property.

Frequently Asked Questions

Can I use a HELOC to buy a house if I still have a mortgage on my primary home?

Yes. The lender will factor your existing mortgage payment into your debt-to-income ratio, but having a mortgage does not disqualify you. You will need enough equity in your primary home and enough income to support both the HELOC payment and your existing mortgage payment.

What happens to my HELOC if my home's value drops?

The lender may freeze your HELOC, preventing you from drawing new money, even if you have not used the full credit line. Some lenders also reduce the credit limit. You will still owe what you have already borrowed, and the payment remains due. This happened to many borrowers during the 2008 housing crisis.

Can I deduct the interest on a HELOC used to buy a second home?

The tax treatment depends on how the money is used. Interest on a HELOC used to buy or improve a home may be deductible, but rules are complex and changed under the 2017 Tax Cuts and Jobs Act. Consult a tax professional before assuming your HELOC interest is deductible.

What if I want to lock in a fixed rate on my HELOC?

Many lenders offer the option to convert part or all of your HELOC to a fixed rate, usually at a higher interest rate than the variable option. You can typically do this during the draw period. Ask your lender about fixed-rate conversion options before you sign the closing documents.

How long does it take to close on a HELOC?

From application to closing typically takes two to four weeks, depending on how quickly the appraisal is completed and how fast the lender processes your documents. If you have a specific closing date for the second property, tell the lender immediately so they can prioritize your file.