How To Get a HELOC on a Second Home

Getting a HELOC on a second home can be done, but consider your options

In the third quarter of 2023, the average U.S. homeowner gained over $20,000 in equity during the past year, according to CoreLogic.

If you own a second home or vacation property in a desirable location, you might be contemplating how to leverage that asset. You’ll be pleased to know that taking out a HELOC on a second home is usually an option.

However, the rules for these types of loans can vary somewhat from those governing your primary residence. Here’s what you can expect about using a HELOC on a second home.

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What is a HELOC?

Home equity lines of credit, or HELOCs, essentially allow you to borrow against the equity you’ve built up in your home.

It’s similar to a credit card in that it’s a revolving line of credit, meaning you can draw from it up to a certain limit and repay it over time. Your home serves as collateral for the loan, securing the borrowed amount.

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How does a HELOC work?

Once you apply for a HELOC and get approved, the lender sets a credit limit based on the appraised value of your home and your financial profile.

This credit limit is the maximum amount you can borrow. During the draw period, which typically lasts for about 5 to 10 years, you can borrow up to this limit. Some lenders may offer you special checks or even a card to access these funds, and you only pay interest on the amount you’ve drawn.

After the draw period ends, the repayment period begins. This is the time frame within which you need to pay back both the principal loan balance and interest payments on whatever you’ve borrowed. The repayment period can vary, but it’s often around 10 to 20 years. Unlike during the draw period, you can’t borrow additional funds during the repayment period.

Can I get a HELOC on a second home?

Yes, you can get a HELOC on a second home, provided you meet the lender’s guidelines.

This means that you don’t have to sell your vacation home to access the equity it’s built up. Instead, you can tap a second home’s value using a cash-out refinance, home equity loan, or home equity line of credit (HELOC).

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Cashing out on a second home can be more appealing than refinancing the mortgage loan on your primary home or reducing its equity. Using your second home lowers the risk of being in a negative equity position with your primary residence should the market take a downturn.

Fortunately, many lenders and banks now allow homeowners to get a HELOC on a second home. The guidelines are a little more stringent than when you take out a loan on your primary home, but it can be done.

Requirements to get a HELOC on a second home

A HELOC can be used to finance a second home or any other property you’d like to purchase. Making sure you meet all the requirements is the first step in getting a HELOC on a second home.

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Specific HELOC requirements will vary by lender, but here are some common hurdles you can expect to meet:

• Higher credit score (often 680 to 700 or more)
• Debt-to-income ratio (DTI) below 43%
• Loan-to-value ratio (LTV) of at least 85%
• Owning the current home for at least one year
• Home appraisal
• Cash reserves

The good news is that second-home mortgage rules are more lenient than those for investment properties. So it will be easier to find lenders offering home equity loans and HELOCs on your vacation home than on an investment or rental property.

Benefits of a HELOC on a second home

A HELOC on a second home can present several advantages, providing you with financial flexibility and possibly some unexpected benefits.

There are numerous examples of homeowners using a HELOC on a second home successfully. Whether it’s for home improvements that increase the property value, funding a new business venture, or managing unexpected medical expenses, a HELOC can provide the necessary capital.

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Financial flexibility

You may have access to a sizable sum of money through a home equity line of credit, which you can use as you need it. This may be helpful in an emergency situation or with large expenses like debt consolidation, home renovations, educational costs, or funding the purchase of a new home or second property.

Lower interest rates

A HELOC frequently has interest rates that are significantly lower than those of credit cards or personal loans because your home serves as collateral for the loan. Over the course of the loan, lower rates may save a lot of money.

Potential tax advantages

The interest paid on a HELOC may, under certain conditions, be tax deductible. This holds true if substantial home improvements are made with the money. To determine if you are eligible for these benefits, it is essential to speak with a tax advisor.

Risks and drawbacks of a HELOC on a second home

Despite its potential benefits, a HELOC on a second home does carry certain risks and drawbacks that need to be considered.

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Possible foreclosure

One of the biggest risks associated with using home equity to purchase a second property is the potential for foreclosure. Your first home is used as collateral for the loan, so if you are unable to make your HELOC payments, the lender has the right to foreclose on it.

Variable interest rates

The majority of HELOCs have variable rates, which means that they may rise over time. This can cause your payments to go up and your financial burden to grow in ways you didn’t expect.

Closing costs and other fees

Just like your original mortgage loan, obtaining a HELOC involves closing costs and other upfront fees, which can add up. These costs can include application fees, home appraisal fees, and annual fees, among others.

Impact on credit score

When you apply for a HELOC, lenders will perform a hard inquiry on your credit report, which can lower your credit score slightly. Also, having a lot of debt from a HELOC can affect your debt-to-income ratio and make it harder to get other types of credit.

It’s prudent to consider the effects of a HELOC on your credit history, as this will play an important role in your personal finances and ability to access credit in the future.

Why are HELOC rules different for second homes?

Prior to the housing downturn of 2008, homeowners could easily tap into home equity — and with very little equity at that. But after 2010, mortgage lenders began to pull back on those loose guidelines. Instead of lending up to 100% of your home’s equity with relatively few credit requirements, many lenders stopped offering home equity loans of any type on second homes.

Why? Unlike your primary mortgage, home loans for vacation properties are a higher risk for lenders.

• Your primary residence is considered to have the least risk when it comes to real estate. The home where you live is most likely the one debt that gets paid, regardless of tough times
• Vacation homes are considered riskier. If times get tough, homeowners are more likely to forego these mortgage payments when money is short

On top of that, second mortgages, including HELOCs and home equity loans, are already considered higher-risk. That’s because these loans fall into a second lien position (behind your first mortgage), meaning they could get paid less or not at all in the event of a foreclosure.

With the dual risk factors of a second mortgage on a second home, lenders are naturally more reserved about offering these loans and charge higher interest rates when they do.

How to apply for a HELOC on a second home

Getting a second home HELOC is comparable to getting a regular HELOC. Once you’ve determined you’re a good candidate for one, follow these steps to apply:

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1. Choose a lender: Do research on different lenders, looking at their interest rates, upfront costs, fees, customer service, and HELOC terms.
2. Begin the application process: Once you’ve decided on a lender, you’ll need to complete their application process, which usually entails filling out a form outlining your financial situation.
3. Gather paperwork: You will almost certainly be required to provide documentation such as tax returns, pay stubs, a list of your debts and assets, and information about your second home.
4. Wait for approval and a home appraisal: After you submit your application, the lender will assess your eligibility and schedule an appraisal to determine the value of your main home. This appraisal will determine the amount of credit that is available through your HELOC.

When choosing a lender for a HELOC on a second home, you should think about their reputation, competitive interest rates and terms, loan amount and equity requirements, fees and costs, and the quality of their customer service.

Alternatives to a HELOC on your second home

Fortunately, even though there are stricter requirements, you won’t be forced into just one loan option in order to access the amount of equity in your second home.

From a home equity loan to a home equity line of credit or a cash-out refinance, you have options. Whether or not you should opt for a cash-out refinance or a home equity loan will depend on your specific situation.

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Feature	HELOC	Home Equity Loan	Cash-Out Refinance	Personal Loan
Interest rate	Variable rates	Fixed	Fixed or variable	Fixed or variable
Collateral required	Yes (your home)	Yes (your home)	Yes (your home)	Usually none
Draw period	5-10 years	N/A	N/A	N/A
Repayment period	10-20 years	5-30 years	Remaining mortgage term	1-7 years
Use of funds	Any	Any	Any	Any
Loan amount	Based on home equity	Based on home equity	Up to 80% of home value	Usually up to $50,000
Closing costs	Yes	Yes	Yes	Usually, none
Impact on mortgage	None	None	Replaces existing mortgage	None
Risk of foreclosure	Yes	Yes	Yes	No

Home equity loans

A home equity loan is generally preferred over a HELOC in situations where you have a one-time expense and want the certainty of fixed monthly payments. For instance, if you’re undertaking a significant home renovation project and you know exactly how much it will cost, a home equity loan can be advantageous. The fixed interest rate means your payments will be consistent over time, making budgeting easier.

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Additionally, a home equity loan can be a good choice if you’re uncomfortable with the variable interest rates associated with a HELOC. Fluctuating rates could make your payments less predictable, which isn’t an issue with a home equity loan’s fixed rates.

People also often opt for home equity loans when consolidating high-interest debts, like credit card balances. The lump sum allows you to pay off those debts immediately, and the typically lower, fixed interest rate of a home equity loan can save you money in the long term.

In essence, if you prefer predictability and have a specific, large expense in mind, a home equity loan might be more aligned with your needs than a HELOC on a second home.

Cash-out refinance loans

A cash-out refinance is a new loan that replaces your current mortgage, allowing you to borrow more than your existing mortgage balance and receive the difference as a lump sum of cash.

If you have an above-market rate on your current mortgage, cash-out refinancing could help you withdraw equity and reduce your interest costs at the same time. Because a cash-out refinance is a “first mortgage” or “traditional mortgage,” it will typically have a lower interest rate than a home equity loan or line of credit, both of which are second mortgages.

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Just note that the rules for a cash-out refinance on a second property will be more stringent than those for cashing out a primary residence. Expect higher interest rates, increased equity requirements, and higher minimum credit scores. In addition, closing costs are typically higher for cash-out refinancing than for a second mortgage.

Personal loans

Personal loans are a popular means of borrowing cash quickly. Similar to cash-out refinancing and HELOCs, personal loans provide cash to be used for just about anything, including home improvements, school tuition, paying down credit card balances, and general debt consolidation — all without having to use your second home as collateral and risk foreclosure. But personal loans often carry higher interest rates. This is why they are often considered a last resort for homeowners.

How to use a HELOC for a down payment on a second home

A home equity line of credit functions similarly to a credit card, allowing you to withdraw funds, repay them, and borrow again within your credit limit throughout the draw period.

Verify your home equity loan options. Start here

You can use some of these funds as a down payment for a second property and to cover improvements and repairs if your HELOC credit line is large enough.

Here are the rules for using a HELOC to make a down payment on a second property.

1. Calculating your loan-to-value (LTV) ratio

The LTV ratio is a key financial metric that compares the appraised value of the property you wish to acquire with the loan amount you’re seeking. For instance, if you aim to purchase a property valued at $150,000 and you’re able to contribute a $15,000 down payment, your loan amount would be $135,000, which is equal to an LTV of 90%.

The principle here is straightforward: A lower LTV ratio is viewed as less risky by lenders.

2. Establishing your budget

Before taking on the financial responsibility of a second home, it’s wise to draft a budget. Using a HELOC for a down payment introduces two additional monthly obligations:

1. The HELOC itself
2. And the mortgage for the new property

Remember, both loans will incur closing costs, typically ranging from 2% to 6% of the loan’s value.

Don’t forget to account for property taxes, insurance, and upkeep costs for the second property.

3. Applying for a HELOC

When applying for a HELOC, the lender will assess your personal finances by reviewing several key factors, including the amount of equity in your primary residence, your credit history, income stability, and the loan-to-value ratio.

Once approved, you can use the money from the HELOC to help pay for a down payment on a new home. Keep in mind that a conventional loan for a second property often requires a minimum down payment of 10%.

4. Searching for your ideal second home

Similar to looking for your first home, you need to find a real estate agent who knows the area you want to live in. This professional can guide you to neighborhoods that match your lifestyle and financial situation and support you through the home purchase process.

5. Financing your second home

Just like your initial home-buying process, acquiring a second home involves making a down payment and obtaining a mortgage, unless you opt to pay the full amount in cash. It’s important to explore various financing options, as lenders offer different terms and interest rates that could significantly affect your long-term financial planning for property ownership.

6. Close on your second home

The closing process for a second home is akin to any mortgage closing and usually completes within 30 to 45 days. It’s important to remember that you will have the financial responsibilities of two mortgage payments in addition to the minimum monthly payment on your HELOC.

FAQ: HELOC on a second home

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Explore options for a HELOC on a second home

Purchasing a vacation home in sought-after locations like New York or California offers the joy of having a dedicated spot for family vacations. When exploring options for a HELOC on a second home, consider the amount of equity in your current home as a significant factor, since lending standards vary by lender and loan type.

Always shop around and compare loans that align with your financial goals, and if mainstream lenders fall short, don’t overlook the value of smaller, local banks or credit unions.

Discover the best financing options for your dream vacation home by clicking below to compare rates with multiple lenders.

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