Using a HELOC to buy another house is legal and common: no loan provision restricts how you spend the funds once you draw them, and lenders regularly see borrowers tap home equity for a down payment or full cash purchase on a second home or investment property. The catch is that the line stays secured by your primary residence, so the house you already live in is the one at risk if the plan goes sideways. That single fact reshapes how you should think about qualification, taxes, and cash flow before you sign.
How the Money Gets to the New Property
A HELOC is a revolving credit line secured by the equity in your primary residence, which is your home’s current market value minus what you still owe on the mortgage. Once approved, you draw funds during a set period (typically ten years) and pay interest only on what you’ve actually borrowed. After the draw period ends, a repayment period of similar length begins and payments include principal.
When you use those funds to buy another property, the seller and the second mortgage lender see a cash purchase or cash down payment. The HELOC doesn’t appear on the new property’s title. It does show up in your overall financial picture, which is where the complications start.
How Much You Can Borrow
Lenders weigh three numbers when sizing a HELOC.
- Credit score. Most lenders look for at least 680, though some now approve scores as low as 620 for borrowers with strong equity. Scores above 720 generally unlock the best rates.
- Debt-to-income ratio. Total monthly debt divided by gross monthly income should generally sit below 43 percent. Some lenders prefer 36 percent and only stretch to 43 percent for strong applicants.
- Combined loan-to-value ratio. Your existing mortgage balance plus the new HELOC, divided by the appraised value, is usually capped at 80 to 90 percent, with 85 percent common. On a $400,000 home with a $200,000 mortgage, an 85 percent cap allows a HELOC up to $140,000.
How the HELOC Payment Shrinks Your Second Mortgage
This is the part most borrowers underestimate. When you apply for a mortgage on the new property, that lender counts your HELOC payment as an existing debt in your DTI calculation. Interest-only draw-period payments still count, and they still reduce the mortgage amount you can qualify for.
A concrete example. A $100,000 HELOC draw at a typical variable rate adds roughly $580 to $750 per month to your debt load. For someone earning $15,000 per month gross, that single payment uses 4 to 5 percent of the DTI ratio before any other debts. The bigger the draw, the less borrowing capacity remains for the purchase.
For investment properties, Fannie Mae currently allows a maximum loan-to-value ratio of 85 percent on a single-unit purchase, meaning at least 15 percent down. Two- to four-unit investment properties require 25 percent down.1Fannie Mae. Eligibility Matrix The HELOC proceeds can supply that down payment; the monthly HELOC payment still factors into whether you qualify for the rest of the financing.
One exception. If you finance the investment property with a DSCR loan (debt service coverage ratio), the lender evaluates whether the property’s rental income covers its mortgage rather than scrutinizing your personal DTI. In that scenario, the HELOC payment does not directly affect qualification.
Tax Treatment of the Interest
The rules are shifting, and the timing matters. Under the Tax Cuts and Jobs Act, which governed tax years 2018 through 2025, HELOC interest was deductible only if the borrowed funds were used to buy, build, or substantially improve the home that secures the loan.2Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction The IRS means the specific home the HELOC is attached to, not any home you own.
So a HELOC on your primary residence used to buy a different property produced interest that was not deductible as mortgage interest during those years.3Internal Revenue Service. Real Estate Taxes, Mortgage Interest, Points, Other Property Expenses Many borrowers assumed the older, more permissive treatment still applied and were surprised at filing.
For tax year 2026, the picture changes. The TCJA provisions suspending the home equity interest deduction are set to expire after 2025. If Congress does not extend them, the pre-2018 rules return: interest on up to $100,000 of home equity debt becomes deductible again regardless of how you use the funds, and the overall acquisition indebtedness cap rises from $750,000 back to $1,000,000.4Office of the Law Revision Counsel. 26 USC 163 – Interest Congress was actively debating extensions as of early 2026, so confirm the current status before filing.
The Rental Property Workaround
If the second property is a rental, interest on funds borrowed to acquire it is generally deductible as a business expense on Schedule E, regardless of what secures the loan. The deduction moves from mortgage interest to rental operating expense, and the economic benefit is similar. If the second home is for personal use, this route doesn’t apply.
The Risk to Your Primary Home
The single biggest risk of this strategy is that your primary residence is the collateral. If you default on the HELOC, the lender can start foreclosure against your home. The fact that you spent the money on an entirely separate property changes nothing about that.
The foreclosure process typically unfolds over months. A missed payment brings a written notice during a grace period. Additional missed payments trigger an acceleration notice demanding full repayment. Between 90 and 120 days of missed payments, the lender files a formal notice of default. If the HELOC lender forecloses, it sits behind your primary mortgage lender because HELOCs hold a second lien position, so the first mortgage is paid first from the sale.
The scenario that causes real trouble is familiar. You stretch to buy an investment property, the rental market softens or the unit sits vacant, and your regular income can’t cover both the HELOC and the new mortgage. You now have two properties with cash flow problems, and the primary home is the one exposed. A default on a home equity product stays on your credit report for seven years.
Draw Period vs. Repayment Period
The two phases matter here more than in most HELOC uses, because your monthly cost changes substantially partway through while you’re still carrying a second mortgage.
During the draw period, typically ten years, most lenders require interest-only payments on the amount borrowed. That keeps the monthly obligation relatively low. When the repayment period begins, usually ten to twenty years, payments rise to cover principal and interest. Borrowers who built their budget around the draw-period payment can get squeezed when repayment starts, especially if the second property isn’t producing the income they projected.
HELOC rates are almost always variable, tied to the prime rate plus a lender margin. Payments can rise during the draw period if rates climb. If your plan depends on specific cash flows from the second property, build in a cushion.
HELOC or Cash-Out Refinance
A HELOC isn’t the only way to pull equity for another purchase. A cash-out refinance replaces your existing mortgage with a larger one and hands you the difference as a lump sum. The trade-offs matter.
- Rates. Cash-out refinances typically carry lower, fixed rates. HELOCs carry variable rates that are generally somewhat higher, but you only borrow what you need.
- Closing costs. Refinancing runs 3 to 6 percent of the total loan amount. Many HELOC lenders charge little or nothing upfront.
- Payment structure. A refinance means full principal-and-interest payments from day one on the entire new loan. A HELOC starts with interest-only payments on just the portion drawn.
- Flexibility. A HELOC lets you draw as needed. A refinance delivers everything at once, which is fine if you know the exact amount and wasteful if you don’t.
If you know the down payment amount, expect to carry the balance a long time, and can lock a fixed rate lower than current HELOC rates, a cash-out refinance may cost less overall despite the higher closing costs. If you want flexibility, lower upfront costs, and can absorb rate variability, a HELOC gives you more control. How much you need, how long you’ll owe it, and how much rate risk you’ll accept decide the answer.