You can turn the equity in your current property into money for a new purchase in three broad ways: borrow against the home with a home equity loan, HELOC, or cash-out refinance; take out a short-term bridge loan so you can buy before you sell; or sell first and roll the net proceeds into the next down payment. Understanding how to use home equity to buy a new home comes down to three questions — how much equity you can actually access, whether you need funds before your current home sells, and how any new debt will affect your ability to qualify for the next mortgage. Each path has different costs, timing, and tax consequences, and those differences decide how many of your equity dollars actually reach the closing table.
How Much Equity You Can Actually Use
Your total equity is your home’s current market value minus what you still owe. Pull the remaining principal from your most recent mortgage statement and get a value estimate — a real estate agent’s comparative market analysis works for a rough number, but a lender will require a formal appraisal before funding anything.
Total equity is not the same as borrowable equity. Lenders cap how much debt your property can carry using a loan-to-value ratio. For a cash-out refinance on a single-unit primary residence, Freddie Mac caps LTV at 80%.1Freddie Mac. Maximum LTV/TLTV/HTLTV Ratio Requirements for Conforming and Super Conforming Mortgages For a HELOC, the combined LTV across your first mortgage and the new line generally has to stay at or below 85%. On a $400,000 home with an 80% cap, total mortgage debt can’t exceed $320,000; subtract what you still owe and you have your borrowable amount.
Most lenders also want a credit score of at least 660 for home equity products, though a stronger overall financial picture can push that lower. A higher score generally earns a better rate, which matters because equity products price above first mortgages.
Borrowing Against Your Current Home
Three products let you pull cash out of your current property. Which fits depends on how much you need, whether you want a fixed payment, and what your existing mortgage rate looks like.
Home Equity Loans and HELOCs
Both leave your existing mortgage in place and add a second lien. A home equity loan delivers a fixed lump sum at closing with a fixed rate and predictable payments. A HELOC works like a credit card: you get a limit, draw as needed during the draw period, and pay interest only on what you use. Either way, the funds hit your bank account and can go toward earnest money or a down payment on the new home.
Both are subordinate liens recorded in the public land records, sitting behind your primary mortgage in priority.2Fannie Mae. B2-1.2-04, Subordinate Financing You’ll be making two monthly payments until you sell the first home or pay one loan off. Read HELOC disclosures carefully: most shift from interest-only payments during the draw period to fully amortizing payments during repayment, and the jump can be significant.3eCFR. 12 CFR 1026.40 – Requirements for Home Equity Plans
Cash-Out Refinancing
A cash-out refinance replaces your existing mortgage with a new, larger one. The new lender pays off your old balance at closing and hands you the difference in cash.4Fannie Mae. B2-1.3-03, Cash-Out Refinance Transactions If you owe $200,000 and want $50,000 out, the new loan is at least $250,000 plus closing costs.
One loan, one payment, one rate. That’s the appeal. The catch: if you locked in a low rate years ago and current rates are meaningfully higher, refinancing surrenders that rate on your entire balance just to unlock a slice of equity. Run the math on the total interest cost before assuming this is the clean option.
Closing costs generally run 2% to 6% of the new loan amount, with origination fees alone in the 0.5% to 1.5% range. Those costs come out of your cash proceeds or roll into the new balance. Either way, they cut into what you can put toward the next house. Timing rules apply too: Fannie Mae requires your existing first mortgage to be at least 12 months old, and at least one borrower must have been on title for six months.4Fannie Mae. B2-1.3-03, Cash-Out Refinance Transactions
Using a Bridge Loan to Buy Before You Sell
A bridge loan is short-term financing secured by the equity in your existing home, designed to be repaid in full when that home sells. Terms typically run six to twelve months, sometimes as short as three or as long as three years. Most bridge loans require interest-only monthly payments with a balloon at the end, or no monthly payments at all with the full balance due at maturity. When the first home closes, the settlement agent uses the sale proceeds to pay off the bridge loan and distributes what’s left to you.
The convenience costs money. Rates generally run at or above prime, and closing costs land in the 1.5% to 3% range of the loan amount. The real risk is timing: if your home takes longer to sell than expected, you can end up carrying three loans at once — the bridge loan, your original mortgage, and the new home’s mortgage. Weigh that scenario honestly before choosing this path.
Selling First and Applying the Proceeds
The simplest way to convert equity into buying power is to sell. A settlement agent or title company collects the buyer’s funds and distributes them according to the contract.5Consumer Financial Protection Bureau. What Can I Expect in the Mortgage Closing Process Your net proceeds are what’s left after the remaining mortgage balance, agent commissions, transfer taxes, and other fees are subtracted.
Commissions are the biggest transaction cost. The national average sits around 5.4% of the sale price, typically split between the buyer’s and seller’s agents. After industry changes in 2024, buyer-agent compensation is no longer automatically offered through the listing service, so the split and total rate are more actively negotiated than before. On a $400,000 sale, half a percentage point is $2,000.
Closing also involves prorations for recurring costs like property taxes, split between buyer and seller based on how much of the billing period each party owned the home. Prepaid taxes past the closing date generate a credit; unpaid taxes owed through closing come off your proceeds. Review the settlement statement — these adjustments can shift the final number by hundreds or thousands of dollars.
Once obligations are satisfied, the remaining equity comes to you by wire transfer or cashier’s check. Coordinating that timing with your next purchase is the harder part. If the two closings can’t happen the same day, plan for temporary housing or a short-term arrangement to bridge the gap.
Tax Consequences That Change What You Keep
Selling and borrowing get taxed very differently, and the difference can move real money.
Capital Gains Exclusion When You Sell
Federal law lets you exclude up to $250,000 of gain from the sale of your primary residence from income, or up to $500,000 if you’re married filing jointly.6Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence You must have owned and used the home as your principal residence for at least two of the five years before the sale, and you can’t have claimed the exclusion on another home in the past two years. Gain above the exclusion is taxed as capital gains, and if the property was rented for part of your ownership, a share of the gain may be allocated to that nonqualified use and taxed regardless.
Interest Deductions When You Borrow
Interest on a home equity loan or HELOC is deductible only if you use the borrowed funds to buy, build, or substantially improve a qualifying home.7Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction Using equity funds as a down payment on a new primary or second home can qualify. Using them for credit card debt or general expenses does not.
Total mortgage debt eligible for the interest deduction is currently capped at $750,000 across all qualifying properties, or $375,000 if married filing separately.7Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction That’s the combined balance of your first mortgage, any equity loan, and the new home’s mortgage. If the total tops $750,000, only interest on the first $750,000 is deductible. Carrying loans on two properties can put you against that ceiling faster than expected.
How Added Debt Affects Qualifying for the New Mortgage
This is where equity strategies most often go sideways. Borrowing against your current home adds debt, and that debt counts against your debt-to-income ratio when you apply for the new mortgage. For conventional loans run through Fannie Mae’s automated underwriting, the maximum DTI is 50%. Manually underwritten loans cap at 36%, or up to 45% with strong credit and cash reserves.8Fannie Mae. Debt-to-Income Ratios
Your current mortgage payment, your new equity loan or HELOC payment, and the projected payment on the new mortgage all count toward that ratio. If the total pushes past the ceiling, the lender may approve less than you need, or require you to pay off the equity loan at closing from your sale proceeds before funding the new purchase. Add up everything — current mortgage, equity loan, expected new payment, car loans, student loans — and divide by gross monthly income before you commit to a strategy. If you’re approaching 45% to 50%, expect friction.
Structuring the Purchase Contract Around a Sale
If your plan depends on selling your current home to fund the new one, the purchase contract needs to reflect that. Two contingency types handle it. A home-sale contingency gives you a set window to find a buyer and go under contract on your current home before you’re obligated to close on the new one. A home-close contingency is narrower and applies when you already have a buyer under contract and just need that sale to close. Both keep you from being locked into a purchase you can’t fund if things fall through.
Sellers don’t love contingencies, and most who accept one will insist on a kick-out clause (sometimes called a continue-to-show provision) so they can keep marketing the property. If a competing offer without a sale contingency comes in, you typically get 72 hours to either waive your contingency and commit to the purchase regardless of your sale, or step aside.
In competitive markets, sale-contingent offers are often the first rejected. A HELOC or bridge loan can eliminate the contingency by giving you the funds up front, which strengthens your offer at the cost of the carrying charges and risks described above. That’s the core trade of every equity strategy here: certainty and flexibility on one side, cost and additional debt on the other.