Can You Use a HELOC to Buy a House?

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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Your home equity grows with each monthly mortgage payment. Each payment gets you closer to owning your home debt-free. Some people take out a home equity line of credit along the journey to fund an expensive item. Some people use HELOCs for an upcoming vacation or another personal expense, but some investors see the HELOC as financing for their next rental property. We will share the details for anyone who wants to use a HELOC to buy a house.

Home Loans and Mortgage Refinancing

Home Equity Lines of Credit (HELOCs): The Basics

A home equity line of credit allows you to tap into the equity you’ve built on your home. Home equity is the difference between a home’s market value and the remaining mortgage debt. Monthly mortgage payments and property appreciation will increase your home’s equity. 

A home equity line of credit is a second mortgage which means more debt and higher monthly costs. The home equity loan gives you upfront capital that you repay over monthly installments. Interest rates vary, but since the home equity loan uses your house as collateral, you can usually get attractive interest rates with HELOCs.

Using a HELOC to Buy Another House

You can use a HELOC to cover any expense, including another house. Buying a home is a significant decision, but it gains importance if you want to buy another house. Each house increases your total debt and monthly mortgage payments. You have to consider how much debt you can manage and look at a property based on its profit potential. If rental income exceeds expenses, the property will pay for itself.

Lenders use several factors to determine if you can take out a mortgage. They have more stringent credit score requirements if you own multiple homes. You can get a mortgage on your first home with a 620 credit score. If you want to acquire a 5th property, you will need a 720 credit score or higher. 

Banks will also review your debt-to-income ratio before letting you purchase another property. Financial institutions would like a debt-to-income ratio below 36% on the backend. Your current financial obligations and the new mortgage must not exceed 36% of your monthly income. For example, if you make $5,000 per month, lenders will only let you buy a second home if all of your debts fall below $1,800 per month (including the mortgage for the new home). 

Some borrowers have to raise their income or pay down more debt before purchasing another home. The debt-to-income ratio becomes less of a concern for rental property owners who have several tenants in cash flow positive assets. Each of these properties would help their debt-to-income percentage instead of being a hindrance. You can also use a home refinance loan to make your debt-to-income ratio more attractive to a lender. A primary residence gives you a place to live, but it will not help your debt-to-income ratio. You can also take out a 30-year mortgage instead of a 15-year mortgage to lower your monthly payments (and reduce your debt-to-income ratio in the process).

Home Loans and Mortgage Refinancing

The Risks of Using a HELOC to Buy Another House

A HELOC can help you own another home sooner. You don’t have to spend years saving a percentage of every paycheck to afford the down payment. However, this advantage comes with several risks you should consider before tapping into your home equity.

Using a HELOC works well if you quickly find a tenant who covers your expenses. However, real estate investing isn’t always that simple. It can take several months for you to fill a vacancy. During each of those months, you will have to make the mortgage payments on your own. Paying for two homes without rental income can strain most people’s financial resources. Any property is a long-term investment, and if vacancies become a recurring theme, financial struggles can force you to default.

You can become wealthier by investing in rental properties and retire sooner. However, financial setbacks from low returns and higher costs can make your financial goals feel out of reach. Some people risk a good retirement for the chance at a great retirement. Investors get greedy during bullish markets and may not prepare for any potential downside. Over-leveraged investors can lose their fortunes if they do not prepare for bearish economic cycles.

Ways of Using a HELOC to Buy a House

Homeowners can build their rental property portfolios with HELOCs. You can use these approaches to buy a house with your home equity loan.

For the Entire Purchase

Some homeowners have enough equity in their homes to fully pay off another home. Your primary residence must have more equity than the asking price for your next home. While you will owe debt on your current home, you get the new home debt-free. Some people use this strategy to acquire a new home right before selling their current home. 

This strategy makes owning multiple homes feel more doable. Instead of paying two mortgages, you pay one home equity loan. Not everyone has enough built-in equity to explore this option. Some investors take out home equity loans on multiple properties to fully pay off the new asset.

For Down Payment 

Most real estate investors only use the HELOC for a down payment. Only using HELOC proceeds for the down payment makes it more manageable. You won’t have to borrow as much capital against your home. Some investors use HELOCs to fund multiple down payments instead of buying homes outright. This approach involves substantial risks and high leverage, but it’s sustainable if rental income exceeds expenses. This strategy can lead to substantial long-term wealth if implemented correctly. This strategy requires skill and good timing to get the best results.

For Home Improvements and Renovations

You don’t have to acquire a newly built home with your HELOC funds. Some people use a home equity loan to improve and renovate an existing home. These renovations increase the home’s value and your equity in the asset. Some home improvements and renovations become necessary because of emergencies. For example, homeowners scramble to fix a property after a flood or other incident to minimize long-term damage. 

Consider Refinancing Your Mortgage Instead

A home equity line of credit is a useful financial resource for acquiring capital. Investors need funds to buy new homes, but a HELOC may not be your best option. A home equity loan increases your debt and monthly mortgage payments. This financial stress can lead to bankruptcy if your new property does not generate positive cash flow. Refinancing your mortgage with loanDepot can help you secure funding for a new home while minimizing risk.

A cash-out refinance provides the homeowner with a lump sum payment, just like a HELOC. During a refinance, you can add a few years to the backend of your mortgage, so monthly payments remain the same. Real estate investors prioritize current cash flow and opt for loans with longer durations. A home equity line of credit adds two debts to your balance: the home equity loan and the new mortgage. Refinancing your mortgage will only add one debt to your balance and ensure monthly mortgage payments on your primary residence stay the same. A refinance can help you safely acquire real estate. You can submit your details to loanDepot for more information about available loans.


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