Can I Use a HELOC to Buy Another House

Can I Use a HELOC to Buy Another House? Understanding Your Options

Whether you are looking to buy a vacation home or an investment property, a home equity line of credit (HELOC) can be a great way to fund the purchase of a second house. Many folks with financial constraints consider this funding option to remove or reduce their out-of-pocket expenses. With the current interest rates on mortgages and the potential savings on monthly payments, many homeowners are finding HELOCs to be an attractive option for financing their real estate ventures.

These loans can serve multiple purposes, such as consolidating debt or making investments, and can be a cost-effective way to finance a home purchase. Nevertheless, using a HELOC does come with risks that are worth considering as well. Continue reading this article to see if HELOCs are a suitable fit for your financial goals and needs. It may also be helpful to consult with a financial advisor to weigh the advantages and disadvantages of this form of borrowing.

3 Quick Insights

1. Homeowners with sufficient financial value in their primary residence can utilize a HELOC to purchase a second residence. 
2. Like conventional mortgages, HELOCs are secured by using your house as collateral. Thus, you risk losing it if you cannot repay the loan.
3. There are other loan-borrowing substitute options that are worth considering compared to a HELOC in some situations.

What Is a HELOC?

A home equity line of credit (HELOC) allows you to access the equity in your current residence and use the money to fund a new project or an investment property. As long as you have a significant percentage of the equity to extract, it’s a great way to borrow a lump sum of money with collateral you already (partially) own. HELOCs, like other forms of borrowing, come with fees and interest rates, so it’s essential to compare the overall cost and terms of the loan before committing.

As the real estate market continues to grow, more homeowners are exploring the possibility of using their homes’ equity to avoid foreclosure or simply to make the most of their investment. Refinancing with a HELOC can offer significant benefits, such as lower interest rates and more manageable payments. However, these loans also come with potential downsides, such as the possibility of higher interest rates. Keep in mind that HELOCs are just one of the many ways to access equity.

What are the Requirements for Obtaining a HELOC?

There are several conditions that borrowers must meet to be eligible to take out a HELOC. While these qualifications may vary by lender, here is an idea of what requirements to expect:

• Home equity (difference from what you owe on the mortgage and its market value) of at least 15 to 20 percent
• A credit score of 620 or higher
• A debt-to-income (DTI) ratio of 43 percent or lower
• Proof of a stable income
• Proof of a reliable payment history  

How Does A HELOC Help With Buying A New House?

A HELOC is advantageous if you have a sizable portion of equity to draw upon. It will let you acquire a line of credit with security that is already partially owned. With a HELOC, you’ll have access to money to fund expensive projects — including the purchase of a new property.

Unlike a HELOC, a home equity loan can provide the total loan amount upfront. The amount depends on the equity you have in your primary home and how much you want to borrow. Moreover, the amount you can obtain is based on your income, credit history, and the current market value of your home. Home equity loans are often capped at 85 percent loan-to-value, although this may vary by lender and the loan program you choose.

What Are the Pros and Cons of Using a HELOC to Make a Purchase?

While HELOCs can serve a great purpose, they are not always the best option. There are plenty of alternatives to HELOCs, like a home equity loan, a cash-out refinance, or a reverse mortgage. To help you make a well-informed decision, check out the pros and cons of a HELOC below:

Pros

• Protect your cash flow: HELOCs enable you to pay for a new property while keeping cash in your pocket. You’ll have more reserves for an emergency fund or other investments.
• Increased borrowing power: A HELOC allows you to make larger down payments that you otherwise won’t be able to cover. That gives you an advantage if you’re house-rich but cash-poor.
• Lower interest rates than other forms of borrowing: HELOCs often have lower interest rates than unsecured loans, such as personal loans.
• Higher chances of approval than with an additional mortgage: HELOCs are less risky for lenders, as they know you’ll prioritize your primary residence. In a nutshell, getting a HELOC to buy a new house is easier than getting a separate mortgage on a new home.

Cons

• Risk your primary home: Since it serves as the collateral of the loan, if you cannot fulfill the HELOC payments, the lender will have the ability to initiate foreclosure on your home. 
• More than one loan payment: Extracting equity to fund a new home means you might have three loans: the primary home mortgage, a second home mortgage, and the HELOC (unless you refinance your primary mortgage for home equity). As a result, you might find yourself overwhelmed with debt, especially if an unexpected financial challenge arises. 
• Higher interest rates than on a traditional mortgage: HELOCs mean you are taking out a second mortgage on your residence (unless you refinance your primary mortgage), and you may be borrowing at a higher total cost. 
• Shouldering the closing costs: Borrowers must cover the closing expenses for both the property purchase and the HELOC, which can easily amount to several thousand dollars.

Moreover, keep in mind that some lenders restrict the source of your down payment and may not accept borrowed funds from a HELOC.

5 Steps To Get A HELOC

Do you still want to use a HELOC to purchase your next house now that you know its advantages and disadvantages? If the answer is yes, below are steps to securing a HELOC:

1. Decide How Much You Want To Borrow

Take the time to analyze your needs and consider how much home equity you need access to.

Lenders may cap the loan-to-value at 85 percent or less. Here’s an example: let’s say the current market value of your home is $250,000, and you still have $100,000 outstanding on the first mortgage. Using an 85 percent loan-to-value means you may have up to $112,500 in equity from which you can borrow for a HELOC ($250,000 x 0.85 = $212,500 less the first mortgage balance of $100,000 = $112,500).  Of course, you would need to qualify for the amount you chose to borrow from your home’s equity.

2. Prepare To Apply For The Loan

As part of a lender’s screening procedure, they’ll calculate the total equity you have based on the current market value of your home. Then, they evaluate your financial standing (e.g., income, credit score, outstanding debts, etc.) to determine how much they’ll lend you. Get ready for this application process and have your documents ready beforehand.

3. Look Around For Other Options

You don’t have to get your HELOC from the bank or mortgage company you’re currently using. In other words, you have the freedom to get multiple quotes to find the most competitive interest rate, loan terms, and closing costs. Don’t forget, these lenders often allow negotiations – haggle a little to get the best deal.

4. Choose And Apply For The Loan You Want

Once you’ve determined which HELOC fits your goals as an investor and purchaser, submit your HELOC application and other required information.

5. Close Your HELOC

You can close your loan after going through the standard underwriting process. As always, ensure that you’re aware of all the terms that come with it.

Frequently Asked Questions About Using a HELOC to Buy a Second Property 

Can I Use a Home Equity Loan as a Down Payment On a Second Home?

Yes, if you possess an adequate amount of equity in your primary home, you can utilize the funds from a HELOC to pay the initial down payment on another property. If you have enough equity, you may even be able to purchase the second home outright without a loan.

How Much Can I Borrow With a HELOC?

Since HELOCs are secured by one’s primary residence as collateral, it is impossible to borrow past the amount of equity possessed in the home. Equity is the difference between the appraised value of the home and the remaining amount owed on the initial mortgage. 

How much one can obtain with home equity is greatly dictated by their loan-to-value (LTV) ratio. An LTV ratio is the amount of existing debt secured by the property, divided by the estimated worth of the home. It is calculated by taking the amount of debt left for the mortgage and dividing that by the real estate market value of the property.

What Are the Alternatives to a HELOC?

Several other loan options allow homeowners to access their built-up home equity. Three of the most common HELOC alternatives are home equity lines of credit, cash-out refinances, and reverse mortgages.

• Cash-Out Refinance: This refinancing option permits homeowners to access their home’s equity in exchange for taking on a larger mortgage. A cash-out refinance is not considered a second mortgage but simply a refinance. Therefore, the monthly payment will not be increased; instead, the loan term will be extended.
• Reverse Mortgage: A home equity-based loan that is only available to homeowners of the age of 62 and older. This tax-free loan option pays off the borrowers’ remaining amount on their primary mortgage and then pays out the remaining balance to the borrower through a line of credit, monthly payment, or lump sum.
• Home Equity Loan: Instead of receiving a line of credit, home equity loans allow homeowners to borrow a lump sum of their home’s value. Borrowers can access and use their equity whenever they see fit. While not as flexible as a HELOC, it is worth considering if offering lower costs and interest rates. 

Final Summary on Choosing a HELOC For Your Needs

Homeowners can use HELOCs to buy another house if they have enough equity in their current home. However, remember that doing so puts your primary residence at risk if you are unable to repay the HELOC. If you are more risk-averse, consider other alternatives to borrowing funds that may be better for your situation.

Should you need further help, contact Wesley Mortgage, the official mortgage provider for Tennessee Titans. Whether you’re looking for a HELOC, reverse mortgage, or cash-out refinance, our team has the experience and knowledge to help you through the full process. Contact us today to get started!