Using a HELOC for a down payment

Equity in your current home can fund the down payment on another, as long as you can carry both payments.

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Common uses

• Second home: keep your primary home and fund the vacation home down payment.
• Buy before you sell: draw for the next home's down payment, then pay off the line when the current home sells.

Be careful

Many lenders won't open a HELOC on a home that's listed for sale. Open the line before listing. If the sale takes longer than planned, you'll carry two mortgages and the line.

Example: buying before you sell

You own a home worth $900,000 with $300,000 owed and want to buy a $1,100,000 home. You draw $220,000 from a HELOC for a 20% down payment. Interest-only at 7.75% APR is about $1,421 a month. Until your current home sells, you're carrying your current mortgage, the HELOC and the new mortgage. When it sells, the HELOC and the old mortgage are paid from the proceeds.

Qualifying for both

The new lender counts all three payments unless your current home is under contract to sell, or you have a signed lease and enough equity for rental income to count. If the numbers don't work, a bridge loan program that excludes the departing home's payment may fit better. Bridge loans.

Timing matters

• Open the HELOC before listing your home. Many lenders won't open a line on a home that's listed for sale.
• Draw only when you're ready to close on the new home.
• Expect the HELOC to be paid off and closed when you sell; check for early-closure fees.

For a first home or a rental

Using a HELOC on a home you own to buy a second home or rental works the same way. Lenders for a primary residence purchase generally require the down payment to come from your own funds; a HELOC on your own property counts, but it's a secured debt they'll factor into your ratios.

Questions people ask

Will a mortgage lender accept HELOC funds for a down payment?

Generally yes, when the borrowed money is secured by an asset you own, like your current home, and documented. The HELOC payment must still fit in your debt-to-income ratio for the new mortgage.

Is a bridge loan better than a HELOC for buying before selling?

Usually not on cost. Bridge loans are built for buying before selling, but they tend to cost more and have shorter terms. A HELOC opened before you list your home is often cheaper.

What if my home doesn't sell after I use a HELOC for the down payment?

You'll carry your current mortgage, the HELOC and the new mortgage until the old home sells, so plan ahead: rent it, lower the price, or budget to carry all three for a set number of months.

Mistakes to avoid

• Listing your home before opening the HELOC.
• Not qualifying for all three payments if the sale takes longer.
• Forgetting the HELOC must be paid at sale, reducing your proceeds.
• Drawing more than needed and paying interest on idle cash.

Example: when the sale takes longer

A family buys their next home using a $200,000 HELOC draw. Their old home takes four months to sell instead of one. They carry three payments for four months, about $1,300 a month in HELOC interest on top of two mortgages. They planned for it with savings, so it was uncomfortable but manageable. Families who haven't set aside a few months of carrying costs are the ones who get into trouble.

Also asked

Can I use a HELOC for closing costs too?

Yes. You can draw for the down payment and closing costs on the new home. The new lender will ask where the funds came from, so keep statements showing the HELOC draw into your account.

More in HELOC guides

• Using a HELOC to buy a rental
• HELOC to fund a business
• HELOC for college costs
• HELOC as an emergency fund
• Should you use a HELOC to buy a car?
• Should you use a HELOC to pay for a wedding?
• Should you use a HELOC to invest in stocks?
• Using a HELOC for a home addition

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