Can I Use a Home Equity Loan for a Down Payment on Another House
Are you considering using a home equity loan to help buy your next house? Whether you’re purchasing a second property for investment, a vacation getaway, or looking for a way to buy a new home before selling your current one, tapping into your home’s equity can feel like an appealing solution.
However, there are key factors and risks to consider before borrowing against your home equity loan for a down payment.
Can I use a home equity loan for a down payment?
Yes, you can use a home equity loan to make a down payment on another house. A home equity loan allows you to borrow against the equity in your current home, giving you access to a lump sum of cash that could help cover a down payment. But this may not be the best option in every situation. Using this strategy depends on your circumstances and buying objectives.
Are you buying a second home?
If you’re thinking of purchasing a second home, whether for vacation or as an investment, using a home equity loan to fund the down payment can be a viable option. With real estate prices rising, many homeowners are taking advantage of the value they’ve built in their current homes to acquire additional properties.
However, keep in mind that borrowing against your equity comes with responsibilities. You’re essentially taking on two mortgages — one for your new home and one for the equity loan. Make sure you’re comfortable managing both before committing.
Later in this post, we’ll review how much you can borrow and the risks you may encounter when using a home equity loan for a down payment.
Are you trying to buy before you sell?
In some cases, homeowners look to buy a new home before selling their current one, hoping to avoid the hassle of temporary housing and moving twice. If you’re exploring this option, you likely recognize that having additional funds for a down payment can allow you to make a stronger offer on your new house before closing the sale on your current one.
However, in most cases, a traditional equity-backed loan is not the best option to solve the buy-sell timing conundrum. A better solution would be a modern buy before you sell program.
If you’re balancing a buy-and-sell scenario, HomeLight’s Buy Before You Sell program can be a valuable resource. This innovative solution unlocks the equity in your current home to streamline and simplify the entire process. You can make a stronger, non-contingent offer on your new home and only move once. Watch the short video below to learn more.
How much equity can I borrow?
The amount of equity you can borrow depends on a few key factors, including the value of your current home, how much you still owe on your mortgage, and your lender’s guidelines. Typically, lenders allow you to borrow up to 80% to 85% of your home’s equity, but this varies based on your credit score, debt-to-income ratio, and the loan type.
To get a rough estimate of how much you could potentially borrow, follow these steps:
1. Determine your home’s current value: Use online valuation tools or consult a real estate agent or appraiser for an updated estimate.
2. Subtract your mortgage balance: Your equity is the difference between your home’s value and what you still owe.
3. Multiply by the lender’s loan-to-value ratio (LTV): This is typically 80% to 85%. If your home is worth $400,000 and you have no existing mortgage, the maximum you could borrow would be 80% or $320,000. However, if you owe $200,000 on your first mortgage, subtract this from the total. In this case, $320,000 minus $200,000 is $120,000. This would be your maximum home equity loan amount.
