Yes, you can use home equity for a down payment on another property, and both Fannie Mae and Freddie Mac allow it. The mechanics are straightforward: you convert equity in your current home into cash through a HELOC, a home equity loan, or a cash-out refinance, then bring that cash to closing on the new place. The catches are less obvious. You’ll owe closing costs on the equity borrowing, you’ll carry two loans against your current home, and the interest on the money you use as a down payment usually isn’t tax-deductible the way most people assume.
The Three Ways to Pull Equity Out
A HELOC is a revolving line of credit secured by your house. The lender sets a limit, and you draw against it during a draw period that typically runs up to ten years, paying interest only on what you’ve used. After that, you enter a repayment phase of up to twenty years covering both principal and interest. The rate is almost always variable, so the payment moves with the market.
A home equity loan delivers the full amount as a lump sum at a fixed rate, repaid in equal monthly installments over a set term. It sits behind your primary mortgage in lien priority, which is why it’s sometimes called a second mortgage.1Federal Trade Commission. Home Equity Loans and Home Equity Lines of Credit Explained For a down payment, the lump-sum structure fits neatly: you know exactly what you need and you get it all at once.
A cash-out refinance replaces your existing mortgage with a new, larger one, and you take the difference at closing.2U.S. Bank. Cash-Out Refinance There’s no second lien, just one bigger first mortgage. The trade-off is that you’re resetting your primary loan, potentially at a higher rate or a longer term than what you already have.
How Much Down Payment You Actually Need
The minimum down payment on the property you’re buying depends on how you’ll use it. The rules tighten as you move away from owner-occupied housing.
- Primary residence: Programs like Fannie Mae’s HomeReady allow combined loan-to-value ratios up to 97% on a single-unit purchase, so as little as 3% down. Borrowed equity counts toward it.3Fannie Mae. Eligibility Matrix
- Second home: Maximum LTV is 90%, meaning at least 10% down. Both Fannie Mae and Freddie Mac allow borrowed equity here.4Freddie Mac. Maximum LTV/TLTV/HTLTV Ratio Requirements for Conforming and Super Conforming Mortgages
- Single-unit investment property: LTV caps at 85% under both Fannie Mae and Freddie Mac, so at least 15% down.3Fannie Mae. Eligibility Matrix
- Two- to four-unit investment property: Maximum LTV drops to 75%, requiring 25% down.3Fannie Mae. Eligibility Matrix
Individual lenders can require more. If a bank tells you it needs 20% or 25% on a rental even though the agency guidelines allow 15%, that’s an internal risk overlay rather than a federal rule. Shop around.
How Much Equity You Can Actually Tap
Lenders won’t let you borrow against every dollar of equity. For a cash-out refinance, Fannie Mae caps LTV at 80% on a single-unit primary residence, so total debt against the home can’t exceed 80% of appraised value.3Fannie Mae. Eligibility Matrix On a home appraised at $400,000, that means combined debt of no more than $320,000. HELOCs and home equity loans use a similar combined loan-to-value calculation, and some lenders will go up to 90% CLTV on those products.
You’ll also need to clear the usual credit and income tests. Most equity products require a credit score of at least 620, with better pricing starting around 680. Fannie Mae’s automated underwriting permits debt-to-income ratios up to 45% on cash-out refinances, while manual underwriting caps at 36% unless compensating factors push it to 45%.3Fannie Mae. Eligibility Matrix
If the money is going toward a second home, Fannie Mae requires at least two months of mortgage reserves on the new property: liquid assets covering two months of principal, interest, taxes, insurance, and any association dues. Investment properties often require six months or more. Those reserves have to exist after the down payment, not before, which is where a lot of borrowers miscalculate.5Fannie Mae. Minimum Reserve Requirements
How the New Lender Verifies Your Down Payment
The lender on the purchase will want a clear paper trail showing where your down payment came from. A large deposit without documentation raises red flags. Provide the closing or settlement statement from your equity transaction to prove the funds came from a secured asset rather than an undisclosed personal loan or credit card.
Expect to hand over the last two months of bank statements so the lender can trace the equity disbursement into your account and then into the purchase. Fannie Mae’s selling guide accepts borrowed funds secured by an asset as a valid down payment source, because the borrowing represents a return of equity you already built. The lender must verify the loan terms, confirm the party providing the secured loan isn’t involved in the sale, and see the funds actually landed in your account.
What It Costs and How Long It Takes
Closing costs on home equity loans and HELOCs generally run 2% to 5% of the amount borrowed. Pull $100,000 and you’re looking at $2,000 to $5,000 in fees before any cash reaches you. That typically includes origination, title insurance, and recording fees. Some lenders offer no-closing-cost options and recover the money through a higher rate over the life of the loan.
Add an appraisal, roughly $300 to $425 depending on property size and location. Cash-out refinances tend to cost more because you’re originating a full new first mortgage with its own title search, underwriting, and insurance.
Timing-wise, a home equity loan or HELOC usually closes in two to six weeks. Cash-out refinances often take longer. Once your equity loan closes, federal law gives you a three-day right of rescission on debt secured by your primary residence, so lenders can’t release the funds until midnight of the third business day after signing.6Office of the Law Revision Counsel. 15 USC 1635 – Right of Rescission as to Certain Transactions In practice, the money hits your account on the fourth business day. If you’re under contract on a new property with a 30-day close, start the equity application well before you sign the purchase contract, not after.
The Tax Trap Most Buyers Miss
Under current law, interest on home equity debt is deductible only if the borrowed money was used to buy, build, or substantially improve the home that secures the loan.7Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction That distinction is the whole point when you’re using equity for a down payment on a different property.
If you take a HELOC on your current home and put the cash toward buying another property, the interest on the HELOC is not deductible. The funds improved your position on a different house, not the one securing the loan. The label “mortgage interest” fools a lot of borrowers here, but the IRS looks at how the money was actually spent.
The interest on the new property’s mortgage is deductible as acquisition debt, because those funds directly financed the qualifying purchase. The combined limit for deductible acquisition debt across your properties is $750,000, or $375,000 if you’re married filing separately.8Congress.gov. Selected Issues in Tax Policy: The Mortgage Interest Deduction
A second home qualifies as a “qualified residence” for the mortgage interest deduction only if you don’t rent it out during the year. Once rental income starts, the property moves into investment territory with a different set of rules for passive income and depreciation.
Risks Worth Sitting With
Every option here uses your current home as collateral. If you can’t keep up with the equity payment and the new mortgage, the lender holding the equity lien can foreclose on your primary residence. Losing the house you already own because of a bet on the one you’re buying is the worst-case outcome, and it’s easier to imagine when housing prices are falling than when they’re rising.
HELOC borrowers carry a second exposure: variable rates. If the benchmark index moves, your payment moves with it. Model what your payment looks like with a rate two percentage points higher than today’s, and check the agreement for lifetime rate caps. If that stress test is uncomfortable, a fixed-rate home equity loan or cash-out refinance is the safer structure.
Finally, think about what happens if the plan doesn’t work. Carrying a first mortgage and an equity lien on your current home while also servicing a mortgage on the new one is a fragile setup. A vacant rental, a job change, or a drop in property values can leave you making three payments with no easy exit. Lender qualification formulas confirm you can handle the debt on paper today; they don’t account for what happens next year. Run the numbers against a scenario where things don’t go as planned before you sign.