A purchase money HELOC is a home equity line of credit you open at the same closing as your first mortgage, used to cover part of the purchase price so the primary loan can stay at 80% of the home’s value and skip private mortgage insurance. The most common setup is 80/10/10: an 80% first mortgage, a 10% HELOC, and 10% cash down. It can save you hundreds of dollars a month, but the HELOC carries a variable rate, sits as a junior lien on your home, and shifts to much higher payments once the draw period ends.
How the Two Loans Fit Together
A standard HELOC lets you borrow against equity you’ve already built. A purchase money HELOC is opened before you have any equity at all, closing simultaneously with the first mortgage and recorded immediately behind it on title. Because it’s originated as part of the acquisition, it qualifies as “purchase money” debt, which matters for how the interest is taxed and for one legal protection you don’t get, discussed below.
The first mortgage gets repaid first in any foreclosure sale; the HELOC gets whatever is left. That extra risk is why the HELOC rate is higher than the first mortgage rate. In exchange, you get a revolving line you can draw from and repay during the draw period, though most purchase money borrowers pull the full amount at closing and treat it like a fixed second loan.
Common Piggyback Ratios
The familiar structure is 80/10/10: 80% first mortgage, 10% HELOC, 10% cash down. Keeping the first mortgage at 80% is what eliminates PMI on a conventional loan.
An 80/15/5 drops your cash to 5% and puts 15% on the HELOC. A less common 75/15/10 shrinks the first mortgage slightly. The 80/20 no-down structure that existed before 2008 has largely disappeared. Plan on bringing at least 5% in cash.
Interest Rates and the Rate Cap
Purchase money HELOC rates are almost always variable, tied to the prime rate plus a margin the lender sets. As of mid-2026, prime sits at 6.75%, so a HELOC with a 1% margin runs around 7.75%. The rate adjusts whenever prime changes, which can happen several times a year.
Federal law requires every variable-rate HELOC to carry a lifetime ceiling, but doesn’t say what the ceiling has to be. Your lender must disclose the maximum possible rate before you open the account. There’s no federal rule requiring periodic caps on how far the rate can jump in a single adjustment, so a spike in prime could move your rate several points in short order. Read that cap disclosure carefully.
Draw Period, Repayment Period, and Payment Shock
A HELOC runs in two phases. The draw period usually lasts 5 to 15 years, and during that time most lenders require only interest payments on your balance. Paying toward principal is optional. When the draw period ends, the loan enters the repayment period, typically 10 to 20 years, and payments recalculate to include principal and interest. You can no longer borrow more.
This transition is where borrowers get hurt. Interest-only payments of $300 on a $50,000 balance can climb well past $500 once amortization kicks in, and the jump scales with the balance. The way to defuse it is to make principal payments during the draw period so the balance is smaller when the switch comes. At minimum, know the date and the projected payment before you sign.
Who Qualifies
Qualifying is harder than for the first mortgage alone because the HELOC lender is sitting in a riskier junior spot. Expect a minimum credit score somewhere between 680 and 720. Combined debt-to-income across both loans generally needs to stay under 43% to 45%. The federal qualified mortgage rule no longer imposes a hard 43% DTI ceiling on first mortgages, but HELOC lenders still use that number as a practical benchmark.
The combined loan-to-value ratio matters just as much. Add the first mortgage balance to the full HELOC credit limit, divide by the appraised value, and most lenders cap that at 85% to 90%. A few stretch to 95% at steeper rates. Most purchase money HELOCs are limited to primary residences. Investment properties, when allowed at all, usually get a CLTV cap of 80% or less and a 720+ credit score requirement. Lenders also want two years of steady employment and a few months of reserves left after closing.
Is the Interest Tax-Deductible?
Generally yes, because the money is used to buy the home. Federal tax law defines “acquisition indebtedness” as any loan used to buy, build, or substantially improve a qualified residence and secured by that residence. First and second mortgages are treated the same; what matters is how the money is spent and that the loan is secured by the home.
Total deductible acquisition debt across all loans on the property is capped at $750,000 for most filers, or $375,000 if married filing separately. The One Big Beautiful Bill Act, signed in July 2025, made this cap permanent; before that legislation, the cap was set to revert to the pre-2018 limit of $1 million after 2025.
The deduction only helps if your itemized deductions beat the standard deduction. For 2026, the standard deduction is $16,100 for single filers, $32,200 for married filing jointly, and $24,150 for heads of household. If your mortgage interest, state and local taxes, and other itemized amounts don’t clear that bar, deducting HELOC interest changes nothing on your return.
No Three-Day Right to Cancel
The three-day right of rescission that normally applies to HELOCs does not apply to a purchase money HELOC. Federal law exempts any “residential mortgage transaction” — a loan used to acquire a principal dwelling — from the rescission right, and the purchase money HELOC falls under that exemption even though it’s a HELOC.
Once you sign at closing, you’re committed. There is no cooling-off period. Scrutinize the rate, the margin, the lifetime cap, the draw and repayment periods, and every fee before you sit down at the closing table, not after.
Purchase Money HELOC vs. Paying PMI
The core argument for the piggyback is that it eliminates PMI, which typically costs between 0.58% and 1.86% of the first mortgage balance per year. On a $300,000 mortgage, that’s roughly $145 to $465 a month. If the HELOC interest payment runs lower than the PMI premium would, the piggyback saves money each month.
The comparison gets more complicated over time. PMI is cancelable once you reach 20% equity. A HELOC balance stays until you pay it off or refinance. PMI premiums are fixed on most conventional loans; HELOC rates float. PMI adds no separate closing costs; the HELOC does, including an origination fee of roughly 0.5% to 1% of the credit line, title insurance, and a credit report fee. Some HELOCs also carry annual participation fees and early termination penalties of 2% to 5% of the credit limit if you close the line within the first two or three years.
Run both scenarios out five and ten years. In a rising-rate environment, the HELOC can easily cost more than PMI over time. In a falling-rate environment, it wins. The right answer depends on your rate outlook, how long you plan to stay in the home, and how aggressively you’ll pay down the HELOC during the draw period.
Risks Worth Weighing Before You Sign
The variable rate is the biggest one. If prime rises two or three points over the life of the loan, your monthly interest cost rises with it, dollar for dollar. A fixed-rate second mortgage would give you payment certainty; a HELOC does not.
Foreclosure risk is real. A HELOC is secured by your home, and if you fall behind, the lender can foreclose the same way a first mortgage lender can. The junior lien position is the lender’s problem in a sale, not yours. You still lose the house.
Your lender can also freeze or reduce the credit line if the property’s value drops significantly after closing. If you’ve already drawn the full amount at purchase, a freeze doesn’t change your balance or payment. But if you were counting on remaining available credit for renovations or emergencies, that access can disappear without warning.
And the payment shock is worth naming again. Many borrowers plan around the interest-only payment and never build the higher amortizing payment into their budget. Five or ten years is long enough to forget what’s coming. Put the transition date and the projected new payment on your calendar the day you close.