Using a HELOC for Your Second Home: Unlocking Opportunities

If you have enough equity in your primary residence, you can use a home equity loan, such as a home equity line of credit (HELOC) as a way to invest in another property and build wealth. This is possible as funds you draw from a HELOC can be used for virtually any purpose (home equity lines of credit can also be used for just about anything!), including the down payment on a second home. By acquiring another property, you can enjoy it as a vacation property for yourself, as well as use it as an income-producing rental property when you’re not living there. 

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Even if you don’t want to keep the second home, funds you get from the home equity line can be used to flip a property for profit. You can acquire another property, conduct the necessary repairs or upgrades, and then resell the home for a profit. Read on as we’ll go over the details of how you can do this, as well as the pros and cons of using home equity loans for a second home or investment property.

What can I do with the funds I get from a HELOC?

Unless specifically prohibited in your loan agreement, funds you get from a HELOC can be used for any purpose. Since you’ll have less home equity after making a draw, however, we typically recommend using home equity loans for things that will provide added value or necessity, like paying off debt. Some examples can include using the money as a down payment on investment properties, paying off personal loans with high-interest rates, and more. 

Using funds as a down payment on a second home

Funds from home equity loans can be used as the down payment for a second home. The property can then be used for vacation purposes or as an income-producing rental property. 

If you decide to use the property as a rental, be sure to account for a vacancy factor as well as costs for things like repairs and maintenance. You’ll want to do this to get a more accurate picture of your income, expenses, and expected net profit. 

If you decide to use the property as a vacation and rent it out when you’re not residing at the property, you should also check with local county regulations to ensure that short-term rentals are allowed. Depending on the property type, some homeowner’s associations may not allow non-owner-occupied properties. 

Conducting improvements and repairs in a fix-and-flip investment home

If you don’t want to retain long-term ownership of a second home, you can still use the funds to earn a profit in the short term. For instance, you can use the home equity line of credit as a bridge loan to fund property repairs and improvements or to acquire a property. Once completed, you can then resell the property for a profit and use the sales proceeds to pay off the balance of the home equity loan.

The idea here is that you can initially acquire a property in need of repairs at a low price. Then, once you complete the property improvements, the home will sell at a high enough price that will more than cover the cost of the repairs, leaving you with a sufficiently high net profit. 

What are the pros of using an equity loan to buy a second home?

You can acquire another property more quickly

Instead of having to save for a down payment from your regular employment income, a HELOC can give you instant access to additional funds you can use for nearly any purpose. This includes using it for the down payment to purchase another property. 

You can leverage funds and get high cash-flow investment property

If you choose your property wisely, you can use the funds from your HELOC to acquire an investment property that generates monthly cash flow in excess of your loan payment. However, if you do this, make sure to account for any long-term property expenses. 

Rates are lower than other types of loans

Alternative sources of funding can include personal loans, hard money loans, bridge loans, and commercial loans. However, HELOCs typically have much more competitive interest rates, which can save you money while still allowing you to use the funds to acquire another property. 

What are the cons of using an equity loan to buy a second home?

You could lose your home

With a HELOC, your home is used as collateral for the loan and you agree to let the lender place a lien on the property. If you default on the loan, this gives the lender the right to foreclose on the house. 

Rates could be variable

Most HELOCs have a variable interest rate, which means that your loan payments could fluctuate over time. If this is the case, check to see how this might affect your ability to pay the loan. Your loan agreement will tell you how high your interest rate could increase over the life of the loan. 

You must pay closing costs

To get a HELOC, you’ll typically have to pay between 1% and 3% of the loan amount in closing costs. This is something you may want to consider if you otherwise have the cash to acquire other property, and don’t want to incur additional costs. For a breakdown of common loan fees, refer to our article on home equity loan closing costs. 

What is the process like for getting a HELOC for second home properties?

The process of getting a HELOC for a second home will be virtually identical to getting a HELOC for any other purpose. We’ve summarized the steps below, but you can also see the details of each step in our guide on how long it takes to get a HELOC. 

Step 1: Apply and submit the required documents

When you submit a loan application, you’ll be providing the lender with basic information about your credit, finances, and the type of loan you’re seeking. The lender will then request items from you to verify your eligibility. Commonly requested documents include:

• Pay stubs and W2 tax forms
• Personal and business tax returns
• Bank statements

Step 2: Appraisal and third-party items are ordered by lender

HELOC is secured by your home. Your lender will need to verify your home’s condition and value through appraisal inspection. The lender will also have a title search conducted to verify the property’s ownership status and to see where there are any outstanding liens against the property. 

Step 3: The lender conducts an underwriting review

Once the lender has received all of your items and the documents from its third-party vendors, it will complete a full underwriting review to determine your eligibility. Your debt-to-income ratio will be calculated to ensure you can afford the monthly payments, and your credit and employment history will also be reviewed. In some cases, the lender may request additional information from you before issuing a final loan decision. 

Step 4: Loan decision is made and signing is scheduled

If you’re approved for the loan, you’ll be told the rates and terms you qualify for. If the terms are acceptable to you, you can then schedule a loan signing with a notary public. This individual’s role is to verify the identity of the individuals signing the final paperwork. 

Step 5: Loan is funded

Once you’ve signed the loan documents, they’ll be reviewed by the lender. If there are no issues, such as missing signatures or incorrect dates, your loan can be funded and you should have the ability to draw funds within 24 to 48 hours. 

Are the qualification requirements different for a HELOC for a second home?

Qualification requirements should not change, even if you’re getting a HELOC for a second home. This is because the lender has already considered whether you can afford the loan payments on the HELOC it has issued you, so your subsequent use of the loan proceeds should not matter. 

We’ve summarized the most common qualification requirements below, but you can also check out our in-depth guide on the underwriting process if you want to learn more.  

Credit

In general, you’ll need a credit score of 640 to get a home equity loan. In addition to your credit score, details of your credit history will also be reviewed. This can include the number and type of loans you have, the severity of any late payments, the age of your accounts, and whether you have recently applied for credit. 

Income & employment history

Your income will be used in calculating your debt-to-income ratio (DTI). Your DTI is determined by taking the total of your monthly loan payments and dividing it by your gross monthly income. Most lenders allow for no more than 45%, and you can view our recommendations on how to lower your DTI if you have concerns. 

Assets

Some lenders may require proof of reserves in order to issue a HELOC. Bank statements will usually suffice as evidence that you can temporarily draw on additional checking, savings, or other bank accounts if your main source of income were to be interrupted. 

Property

The value and condition of your property will be reviewed by your lender. Lenders typically require you to have at least 20% equity in the home, and the property must be free of construction, health, and safety hazards. Check out our tips on how you can prepare for an appraisal inspection. 

What about using a closed-end home equity loan or cash-out refinance instead of a HELOC?

A home equity loan is similar to a HELOC, but instead of allowing you the flexibility to draw funds continuously up to the credit limit, you’re given a single lump sum of funds. You’ll also typically get a fixed interest rate, so your loan payments won’t change over the life of the loan. If you don’t foresee a recurring need to draw additional funds and you know exactly how much funding you need, a home equity loan can be a better alternative. 

A cash-out refinance, on the other hand, allows you to replace your existing primary mortgage entirely. Cash-out refinancing will give you a new mortgage balance that will be larger as you’ll be paying off the existing loan and getting additional funds to be used for other purposes. This can be useful if you find a lower interest rate and don’t want to deal with multiple mortgage payments.

Should I get a HELOC for a second home?

Carefully consider the pros and cons before getting a home equity loan, such as a HELOC, for a second home. While having access to these funds has many upsides, there are also risks to consider. For example, getting a home equity line of credit for a second home can help you generate more cash flow and build your wealth. However, if things do not go according to plan, you could lose your primary residence if you’re no longer able to afford the monthly payments.

Disclaimer: The above is provided for informational purposes only and should not be considered tax, savings, financial, or legal advice. All information shown here is for illustrative purpose only and the author is not making a recommendation of any particular product over another. All views and opinions expressed in this post belong to the author.