You can use your current house as a down payment on a new home by selling it and applying the proceeds, borrowing against the equity with a home equity loan, HELOC, cash-out refinance, or bridge loan, or writing a sale contingency into the purchase contract so the two transactions depend on each other. Equity — your home’s market value minus what you still owe — is the number driving every one of these options. The right path depends on how much equity you have, how fast your market is moving, and whether you can carry two housing payments if the timing slips.
Start With Your Available Equity
Subtract your remaining mortgage balance from your home’s current market value. A home worth $400,000 with a $220,000 balance leaves roughly $180,000 in equity. Not all of that is spendable: sale costs or lender limits will shave it down, but the figure tells you what you have to work with.
Then look at what the new loan actually requires. Conventional loans go as low as 3% down for qualified first-time buyers with a credit score of at least 620. FHA loans require 3.5% down with a score of 580 or higher. Put down less than 20% and you’ll pay private mortgage insurance on the new loan, which raises your monthly payment.1Consumer Financial Protection Bureau. What Is Private Mortgage Insurance Knowing the minimum lets you decide how much equity you actually need to pull.
Sell Your Current Home First
Selling first is the simplest path. You close on your old home, pay off the mortgage and closing costs, and use what’s left as the down payment on the next one. You skip the stress of two mortgages and know exactly how much cash you have before making an offer.
The trade-off is timing. You may need temporary housing between closings, and in a fast market you can lose out on properties while waiting for your sale to go through.
A gain on the sale may be tax-free. Single filers can exclude up to $250,000 of gain, and married couples filing jointly up to $500,000, if you owned and used the home as your primary residence for at least two of the five years before the sale.2Internal Revenue Service. Topic No. 701, Sale of Your Home The two years of ownership and use don’t have to be consecutive; they just have to total 24 months inside that five-year window.3Internal Revenue Service. Publication 523, Selling Your Home
Home Equity Loan or HELOC
If you want to buy before you sell, you can borrow against the equity in your current home. Two products handle this differently. A home equity loan gives you a lump sum at closing, usually at a fixed rate. A home equity line of credit (HELOC) works like a credit card: you draw what you need up to a set limit, typically at a variable rate.4Consumer Financial Protection Bureau. What Is the Difference Between a Home Equity Loan and a Home Equity Line of Credit
With either product, the lender takes your home as collateral and caps the loan at a percentage of appraised value minus what you owe. Closing costs typically run 2% to 5% of the amount borrowed, and the debt sits alongside your existing mortgage until you pay it off or sell. A HELOC’s draw period lasts several years, giving you flexibility on when to pull the money. Once the draw period ends, repayment begins and you can no longer borrow.5Consumer Financial Protection Bureau. Home Equity Lines of Credit Brochure
Watch the tax angle. Interest on a HELOC or home equity loan is deductible only when you use the borrowed money to buy, build, or substantially improve the same home that secures the loan. If you take a HELOC against your current house and use the cash as a down payment on a different house, the interest is not deductible.6Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction That makes equity borrowing more expensive after taxes than the rate alone suggests.
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a new, larger one and hands you the difference in cash.7Veterans Affairs. Cash-Out Refinance Loan Owe $200,000 on a home appraised at $400,000, refinance into a $300,000 loan, and you walk away with roughly $100,000 before closing costs for a new down payment.
Conforming cash-out refinances on a single-unit primary residence are capped at 80% loan-to-value, so you have to leave at least 20% equity in the property.8Freddie Mac. Maximum LTV TLTV HTLTV Ratio Requirements for Conforming and Super Conforming Mortgages Rates on cash-out refinances tend to run a quarter to half a percentage point above standard refinance rates, and closing costs stay in the 2% to 5% range. You also reset your amortization schedule, meaning more total interest over the life of the loan if you keep the home.
Bridge Loan
A bridge loan is short-term financing built for the gap between buying a new home and selling the old one. The lender gives you a lump sum secured by the equity in your current property. You use it for the down payment and closing costs on the new purchase, then repay the bridge loan in full when the old home sells.
Bridge loans usually run about 12 months. Rates sit well above standard mortgage rates because the lender takes on more risk, and origination fees typically run 1% to 2% of the loan amount. Some lenders allow a debt-to-income ratio as high as 50%, since they expect you to be carrying two properties temporarily. The payoff is speed: you can make an offer without waiting on your sale. The risk is that a slow sale piles up interest or forces you to extend the loan at added cost.
Sale Contingency in the Purchase Contract
A sale contingency ties your obligation to buy the new home to successfully selling your current one first.9National Association of REALTORS. Consumer Guide Real Estate Sales Contract Contingencies If your home doesn’t sell inside the agreed window, you can walk away from the purchase without penalty. No borrowing, no two mortgages.
Sellers tend to view contingent offers as weaker, especially in competitive markets where other buyers can close without conditions. Many sellers who accept one insist on a kick-out clause, which lets them keep marketing the home and take a non-contingent offer if one shows up. If that happens, you usually get 72 hours to either drop the contingency and commit or walk. In a hot market, this route can cost you the deal.
Gift of Equity When Selling to Family
If the buyer is a family member, a gift of equity is a direct way to turn your house into their down payment. You sell below appraised value, and the difference becomes the buyer’s down payment. A home appraised at $350,000 sold to your child for $280,000 creates a $70,000 gift of equity.
Fannie Mae permits a gift of equity from an acceptable donor to fund all or part of the down payment and closing costs on a primary residence or second home.10Fannie Mae. Gifts of Equity – Fannie Mae Selling Guide The transaction needs documentation, including a signed gift letter and a settlement statement reflecting the gift. Because the donor is a family member rather than an interested party like an agent, the gift isn’t subject to interested-party contribution limits. This route only applies when you’re selling to family; it isn’t an option in an arm’s-length sale.
Tax Consequences
Selling a home can trigger tax reporting. The closing agent generally has to file Form 1099-S with the IRS to report the sale, unless the sale price is $250,000 or less ($500,000 for married sellers) and the seller certifies the gain is fully excludable under the primary-residence rule.11Internal Revenue Service. Instructions for Form 1099-S Proceeds From Real Estate Transactions
If your gain exceeds the exclusion ($250,000 single, $500,000 married filing jointly), you owe capital gains tax on the overflow.2Internal Revenue Service. Topic No. 701, Sale of Your Home Hold onto records of improvements you’ve made over the years. Those costs add to your tax basis and shrink the taxable gain.
Loan proceeds from a HELOC, home equity loan, or cash-out refinance aren’t taxable income. But as noted earlier, interest on money borrowed against one home and used to buy another isn’t deductible.6Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
Risks to Weigh Before You Commit
Each path has its own exposure. Think through these before choosing:
- Carrying two mortgages. Borrowing against your current home (HELOC, home equity loan, cash-out refinance, or bridge loan) means you’re paying on two properties if the old one doesn’t sell on schedule. Budgets strain fast.
- Over-leveraging. Pulling too much equity leaves a thin cushion. A dip in home values can leave you owing more than the property is worth at sale.
- Bridge loan costs. Higher rates and origination fees mean a slow sale eats into the equity you were counting on.
- Kick-out clauses. A seller who accepts a contingent offer may keep marketing the home anyway. A better offer gives you a short window, often 72 hours, to drop the contingency or lose the deal.
- Credit score hit. Applying for a HELOC, refinance, or new mortgage triggers a hard inquiry. The effect is usually small, under five points for most borrowers, and multiple mortgage inquiries inside a 14-to-45-day window count as one for scoring.
- Lost interest deduction. HELOC or home equity loan interest used toward a different property isn’t tax-deductible, raising the real cost of borrowing.
Which approach fits comes down to your equity position, how fast homes are moving where you live, and how comfortable you are owning two properties for a stretch. Talking to a mortgage lender before you start house-hunting gives you a firm number on accessible equity and a clearer read on which route actually works for your situation.