Using home equity to buy another house means borrowing against the value you’ve built in your current home and applying that cash toward a second property. If your house is worth $500,000 and you owe $300,000, you hold $200,000 in equity, and lenders will let you borrow against a portion of it for a down payment or, in some cases, the full purchase price of the next place. The strategy works, but the loan is secured by the home you live in. Miss enough payments and the lender can foreclose on your primary residence, not the property you bought with the money.
Three Ways to Pull Cash From Your Equity
Home Equity Loan
A home equity loan hands you a lump sum at a fixed interest rate, repaid in equal monthly installments over a term that usually runs five to thirty years.1Consumer Financial Protection Bureau. What Is a Home Equity Loan It sits behind your original mortgage in payment priority, which is why it’s often called a second mortgage. The fixed payment makes budgeting predictable, and the lump sum works well when you know the exact down payment you need.
Home Equity Line of Credit
A HELOC works more like a credit card. The lender approves a borrowing limit, and you draw against it as needed during an initial period that typically lasts up to ten years.2Federal Trade Commission. Home Equity Loans and Home Equity Lines of Credit You pay interest only on what you’ve actually used during the draw period. When that period ends, you enter repayment (often twenty years) and start paying principal and interest. Most HELOCs carry variable rates tied to the prime rate, so your monthly cost can move. Federal rules require the lender to state the lifetime maximum rate the HELOC can reach, which gives you a worst-case number to plan against.
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a new, larger one and pays you the difference at closing. This resets your rate and loan term on the entire balance, which can be attractive if current rates are lower than what you’re already paying. Closing costs run higher than a home equity loan or HELOC because you’re refinancing all of your existing debt, not just adding to it. Freddie Mac caps the loan-to-value ratio for a cash-out refinance on a primary residence at 80%, so you need at least 20% equity remaining after the new loan.3Freddie Mac. Maximum LTV/TLTV/HTLTV Ratio Requirements for Conforming and Super Conforming Mortgages
What Lenders Will Require
Loan-to-Value Ratio
Loan-to-value measures total mortgage debt against your home’s appraised value. Most lenders cap the combined LTV at 80%: your existing mortgage plus the new equity borrowing cannot exceed 80% of the home’s worth. On a $400,000 home, that means total debt of no more than $320,000. Some lenders will go to 85% or 90%, but those tiers require stronger credit and come with higher rates.3Freddie Mac. Maximum LTV/TLTV/HTLTV Ratio Requirements for Conforming and Super Conforming Mortgages
Credit Score and Debt Load
Expect a credit score floor of 660 to 680 for home equity products. Qualifying at that level won’t get you the best pricing; the higher your score, the more you can borrow and the less you’ll pay in interest. On the debt side, lenders generally want your total monthly obligations, including the new equity payment, to stay at or below 43% of your gross monthly income. A few will stretch that ceiling if you show strong compensating factors like high cash reserves.
Cash Reserves
When you’re borrowing against your home to buy a second property, the lender wants to see you can cover payments on both properties if income drops. Fannie Mae requires at least two months of mortgage payments in reserve for a second home purchase. For an investment property, the minimum jumps to six months.4Fannie Mae. Minimum Reserve Requirements Reserves are measured against the full monthly payment on the new property, including taxes and insurance. If you already own multiple financed properties, expect the reserve requirement to climb further.
Minimum Loan Size
Most lenders set a minimum home equity loan or HELOC at around $10,000, and some require $25,000 or more. If you only need a small amount of cash, an equity product may be the wrong tool.
Second Home Versus Investment Property
This distinction drives your down payment, your interest rate, and how the lender qualifies you, so it matters more than most buyers assume. A second home is a property you plan to occupy for part of the year: a beach house, a ski cabin, a place near where you work. An investment property is one you plan to rent out for income. Lenders verify the difference at application, and misrepresenting your intent is mortgage fraud.
Down payments reflect the added risk. A second home typically requires at least 10% down. A single-unit investment property needs at least 15%, and multi-unit investment properties of two to four units need 25%.5Fannie Mae. Eligibility Matrix Rates follow the same pattern. Second home rates tend to run about half a percentage point above primary residence rates, and investment property rates sit another quarter to half point above that. Getting approved on second-home terms for a property you immediately rent out can trigger a loan recall.
Counting Rental Income Toward Qualification
If you plan to rent the new property, some of the projected rental income can help you qualify, but not dollar for dollar. Fannie Mae guidelines have lenders multiply gross monthly rent by 75%, assuming the remaining 25% is lost to vacancy and maintenance.6Fannie Mae. Rental Income So $2,000 a month in projected rent counts as $1,500 toward your income.
There are conditions. If you don’t currently have a housing payment (say you own your primary home free and clear) and you lack property management experience, lenders may not let you count projected rental income at all. If you do have a current housing payment but no management history, the rental income may only offset the new property’s costs rather than boost your overall qualifying income.6Fannie Mae. Rental Income To document projected rents, lenders typically require an appraiser to complete a comparable rent schedule for the area. A signed lease strengthens the file, especially when the property is being placed into service for the first time.
The Mortgage Interest Tax Trap
Here’s a rule people routinely miss. If you take a home equity loan or HELOC against your primary residence and use the money to buy a different property, the interest on that equity borrowing is not deductible as mortgage interest. The IRS allows a deduction on home-secured debt only when the borrowed funds were used to buy, build, or substantially improve the home that secures the loan.7Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction A HELOC on your primary home used to fund a vacation house down payment fails that test.
The mortgage you take directly on the second property is different. It can qualify for the deduction as long as the home is one you personally use and the total acquisition debt across both homes stays within the federal limit. For mortgages taken after December 15, 2017, the combined cap is $750,000, or $375,000 if you’re married filing separately. Older mortgages taken on or before that date fall under the previous $1,000,000 limit.8Internal Revenue Service. Real Estate Taxes, Mortgage Interest, Points, Other Property Expenses If the second property is a pure rental, the picture shifts again. Mortgage interest on an investment property may be deducted as a business expense on Schedule E rather than as an itemized deduction. Work the numbers with a tax professional before assuming the deduction favors one financing approach over another.
Timeline, Closing Costs, and the Rescission Window
From application to closing, home equity loans and HELOCs typically take two to six weeks. The appraisal is the biggest variable. Some lenders use automated valuation models that pull data almost instantly; a full in-person appraisal for an unusual or rural property can add one to three weeks. Underwriting itself may take days when your file is clean or stretch to weeks if the lender comes back for more documentation.
Closing costs generally run 2% to 5% of the loan amount, though they can be as low as 1%. Typical fees include the appraisal ($300 to $500), a title search, lender’s title insurance, origination or application fees, recording fees, and notary costs. Some lenders advertise no-closing-cost products that fold the expenses into a higher rate, so you still pay, just over time. Ask for a written breakdown of every fee before you commit.
For a home equity loan or HELOC secured by your primary residence, federal law gives you three business days after closing to cancel the deal for any reason, without penalty.2Federal Trade Commission. Home Equity Loans and Home Equity Lines of Credit The lender cannot release funds until the rescission window closes. Build that delay into your timeline when you’re coordinating with the seller on the second property. Once the window passes, the lender disburses by wire or certified check, which you direct to the escrow agent or closing attorney handling the purchase.
Risks Worth Taking Seriously
The most important risk is the most obvious one, and it gets underestimated. Your primary home secures the debt. If the rental sits vacant, if repair bills spiral, or if your income drops, you still owe the equity payment. Fall far enough behind and the lender can foreclose on the house you live in.2Federal Trade Commission. Home Equity Loans and Home Equity Lines of Credit That’s a different risk profile than investing cash from a brokerage account.
Variable-rate HELOCs add another layer. A rate that feels comfortable today can rise substantially over a ten-year draw period. If rates climb two or three percentage points, the monthly cost jumps even though you haven’t borrowed any more money. Run the numbers at the maximum rate the lender discloses, not the introductory rate, and see whether you can absorb the worst case.
There’s also the risk of going underwater. If property values fall after you borrow, you could owe more than the home is worth, which makes selling difficult and refinancing nearly impossible. Keeping combined LTV well below the maximum a lender will approve builds a cushion against a market downturn.
Finally, watch the products marketed as alternatives to traditional home equity debt. Some companies offer home equity investments or shared equity agreements that pay you cash upfront in exchange for a share of your home’s future value. They advertise no monthly payments and no interest, but the CFPB has found the effective annual cost can exceed 19% when the repayment formula is calculated out, and the company places a lien on your property much like a mortgage.9Consumer Financial Protection Bureau. Issue Spotlight: Home Equity Contracts: Market Overview The bureau has flagged these contracts as carrying substantially higher costs than most home-secured credit under typical home price scenarios.