Yes, using home equity as a down payment on another property is a well-established strategy, and homeowners typically do it through one of four tools: a home equity line of credit (HELOC), a home equity loan, a cash-out refinance, or a bridge loan. Each converts the value you’ve built in your current home into usable cash for the next purchase, but the costs, timing, and risk profile differ enough that the right choice depends on your numbers and your plans for the two properties.
Equity itself is just the gap between what your home is worth and what you still owe. A $400,000 appraisal against a $250,000 mortgage balance leaves $150,000 of equity. Lenders won’t let you touch all of it, but the accessible portion is often enough to fund a down payment on a second home, a rental, or your next primary residence.
The Four Ways to Pull Equity Out
HELOC
A HELOC works like a credit card secured by your house. The lender sets a credit limit based on your equity, and you draw from it as needed during a draw period that typically runs about 10 years. You pay interest only on what you’ve actually withdrawn. That flexibility helps when you’re still house-hunting and don’t know the exact down payment figure yet. Most HELOCs carry variable rates, though some lenders offer a fixed-rate conversion option that lets you lock in part of the balance at a set rate for a chosen term.
Home Equity Loan
A home equity loan delivers a lump sum at closing with a fixed rate and fixed monthly payments over five to 30 years. The math is predictable from day one, which suits a borrower who already knows the down payment amount. It sits as a second lien on your property, so you’ll carry two mortgage payments until it’s paid off.
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a larger one and gives you the difference in cash. There’s no second lien; your entire primary debt is reset to new terms. Closing costs run between 2% and 5% of the new loan amount, and if current rates sit above your existing rate, you’ll pay more over the life of the loan. If your original rate is already higher than today’s market, though, this can be the cleanest path.
Bridge Loan
Bridge loans solve a specific timing problem: you’ve found the next house but haven’t sold the current one. These short-term loans, usually six to 12 months, borrow against your current equity to cover the new down payment and get paid off when the old property sells. Rates are higher than conventional mortgages and the fees are steep for the short term, so treat this as a last resort when the deal timing won’t line up any other way.
What You Need to Qualify
Equity Cushion
Lenders cap how much total debt can sit against your property. Combined loan-to-value (CLTV) ratios on most home equity products top out at 80% to 85%, meaning you need to keep at least 15% to 20% equity after the new borrowing. Some lenders stretch to 90% CLTV for strong borrowers, with higher rates to match.
Investment properties face tighter limits. Fannie Mae allows a cash-out refinance up to 80% LTV on a single-unit primary residence, 75% on a single-unit investment property, and 70% on multi-unit investment properties.1Fannie Mae. Eligibility Matrix
Credit Score
Most lenders want a minimum score in the 660 to 680 range. You can qualify at the lower end, but borrowers in the 700s see meaningfully better rates. A 40-point swing in credit score can mean half a percentage point or more on the rate, which compounds across a loan you may carry for 15 to 20 years.
Debt-to-Income Ratio
Total monthly debt payments generally cannot exceed 43% of your gross monthly income, counting car loans, student debt, credit card minimums, your existing mortgage, and the new equity payment.2Consumer Financial Protection Bureau. What Is the Ability-to-Repay Rule This is where people pulling equity for a down payment often get caught: you’re layering the equity product payment on top of the new purchase mortgage, and both have to fit under that ceiling together.
Reserves
Lenders want to see you aren’t tapped out after closing. Fannie Mae requires at least two months of reserves for a second home purchase and six months for an investment property, measured against payments on the new property. Multiple financed properties can push the requirement higher.3Fannie Mae. Minimum Reserve Requirements
The Interest Deduction Trap
This is where homeowners make an expensive assumption. Interest on a home equity loan or HELOC is deductible only when the borrowed funds are used to buy, build, or substantially improve the home that secures the loan.4Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction If you take a HELOC on Home A and use the money as a down payment on Home B, the interest on that HELOC is generally not deductible as mortgage interest. The debt is secured by one property, but the money benefits another, and the rule hinges on both pointing at the same house.
The purchase mortgage on the new property is still deductible under the usual rules, subject to the overall cap. For debt secured after December 15, 2017, the total mortgage interest deduction applies to the first $750,000 of qualifying indebtedness, or $375,000 if married filing separately. Mortgages taken out before that date fall under a higher $1 million limit.4Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction Legislation enacted in mid-2025 may affect these thresholds for future tax years, so confirm the current rules with the IRS or a tax professional before you file.
What It Costs to Borrow Against Your Equity
Tapping equity isn’t free. Closing costs on a home equity loan or HELOC typically run 2% to 5% of the loan amount, which means $2,000 to $5,000 on a $100,000 draw before you’ve spent a dollar on the new property. Cash-out refinances fall in the same percentage range, but the percentage is calculated against the entire new loan balance, not just the cash portion.
Expect to see:
- Appraisal fees of $300 to $500 for a standard single-family home, more for complex or high-value properties.
- Origination fees of 0.5% to 1% of the loan amount, sometimes waived by lenders competing for your business.
- Title search costs of $75 to $250, plus 0.5% to 1% of the loan amount for a lender’s title insurance policy.
- Recording fees that vary by jurisdiction, typically $25 to $75.
Some lenders market “no closing cost” equity products, but the costs are usually rolled into a higher rate. You still pay them, just slower and with interest attached.
How the Borrowing Actually Happens
Lenders will ask for W-2s from the last two years, pay stubs covering the most recent 30 days, current mortgage statements, and, for self-employed borrowers, two years of federal tax returns with any 1099s. These feed the income verification and DTI math. Having a rough sense of your home’s current value before applying helps set expectations; recent sales of comparable homes nearby give a reasonable baseline.
Once you apply, the lender orders an appraisal to set the property’s current market value, which fixes your actual equity and the maximum loan amount. Underwriters then verify income, employment, and the rest of the documentation. Mismatches, like income figures that don’t line up with tax records, can trigger requests for more paperwork or shrink the approved amount.
At closing you’ll sign a promissory note and a deed of trust or mortgage that places a lien on your home. For home equity loans and HELOCs on a primary residence, federal law gives you a three-day right of rescission: you can cancel without penalty until midnight of the third business day after closing.5eCFR. 12 CFR 1026.15 – Right of Rescission That right does not apply to the purchase-money mortgage you’ll use to buy the new home, and it generally does not apply to a standard refinance with the same creditor unless new money is being advanced beyond the existing balance.6Office of the Law Revision Counsel. 15 USC 1635 – Right of Rescission as to Certain Transactions After the rescission window closes, the funds disburse and you direct them to the closing agent for the new purchase.
Risks Worth Taking Seriously
Your current home is collateral for the new debt. Fall behind on a home equity loan or HELOC, and the lender can foreclose on your primary residence even if the first mortgage is current. That is the risk most borrowers underestimate: this strategy puts your existing home on the line against your ability to carry two sets of housing costs at once.
Variable-rate HELOCs add rate risk. If rates climb, so does your payment. Before borrowing, run the payment at a rate two full percentage points above where it starts. If that number makes the monthly budget uncomfortably tight, a fixed-rate home equity loan or a fixed-rate HELOC conversion may justify the slightly higher starting rate.
There’s a leverage problem too. Pulling equity from one property and placing it into another leaves less cushion in both. A modest dip in values can push you underwater on one or both homes, which is especially painful if the plan was to sell the original and pay off the equity debt on a timeline the market refuses to honor.