What is a HELOC?
A home equity line of credit (HELOC) is a flexible way of tapping home equity, converting a portion of your home’s value into accessible cash. It’s a second mortgage that gives you a set amount of credit to draw from, secured by your home.
The loan has two distinct phases: a draw period where you can borrow money as needed, and a repayment period to pay off the balance. This makes a HELOC an excellent tool for funding ongoing expenses or a series of projects, since you pay interest only on the money you’ve actually used.
While it offers flexibility, keep in mind that HELOCs have a variable interest rate, which means your payment can change over time based on the fluctuation of interest rates.
Is a HELOC a second mortgage?
Yes, a HELOC is a type of second mortgage. But the terms aren’t exactly interchangeable. Let’s dig into the second mortgage vs. HELOC comparison.
“Second mortgage” refers broadly to any loan that’s secured by your home and takes second position behind your primary mortgage. That includes both HELOCs and home equity loans.
Unlike HELOCs, home equity loans provide a lump sum up front with a fixed interest rate.
Here is a quick comparison of the two. If you want more details, deep dive into HELOCs vs. home equity loans.
| Feature | HELOC | Home Equity Loan |
|---|---|---|
| How it works | Revolving line of credit | Lump sum loan |
| Interest | Usually variable; interest is only on what you borrow | Fixed rate on the full amount |
| Repayment | Interest-only during draw period, then principal and interest payments | Fixed monthly payments until paid off |
Can you use a HELOC for a down payment on a second home?
Yes—in some cases. Using a HELOC to fund a second home down payment is a popular strategy for homeowners who want to access their equity without draining their cash savings. However, this approach adds another layer of debt and is subject to strict lender requirements.
Lender requirements and restrictions
Every lender has specific rules around using HELOCs for investment property or a second home. Always confirm the HELOC second home rules up front to avoid surprises during underwriting.
Loan-to-value (LTV) limits and credit considerations
Lenders evaluate your financial profile when you’re leveraging equity, including:
Credit and DTI: You’ll need a strong credit score (often a 680+ FICO® score) and a healthy debt-to-income (DTI) ratio.
Your home’s equity: Most lenders require you to maintain a certain amount of equity in your primary home—typically 15%-20%—even after a HELOC is taken out.
Loan purpose: Some lenders prohibit the use of a HELOC for a down payment on another property, while others may require a larger down payment or more cash reserves.
Pros and cons of using a HELOC for a second home
A HELOC can be a useful tool, but make sure you do your homework on the pros and cons before you commit. Use our HELOC calculator to estimate the costs and see if it’s the right home equity financing option for you.
| Pros | Cons |
|---|---|
| Access cash without selling investments or draining savings | Your monthly payments may rise if interest rates go up |
| The ability to draw funds as you need them | Not all lenders allow a HELOC for a second home down payment |
| Flexible funds can also cover unexpected costs after closing | Adds another layer of debt and risk to your primary home |
Alternatives to HELOCs for your down payment
If a HELOC isn’t right for you, check out other mortgage down payment sources:
- Cash-out refinance: Replace your primary mortgage with a larger one and receive the difference in cash.
- Personal loan: An unsecured loan that typically has higher interest rates than a HELOC.
- Retirement account loan: Borrow from a 401(k) or similar plan but be aware that this reduces your retirement savings.
- Saving over time: The safest option, as it avoids adding any new debt.
How to apply for a HELOC
The HELOC application process is similar to that of a mortgage: you’ll need documentation for your income, assets and the property itself. The lender will then review your equity, credit score and DTI ratio to set your borrowing limit and terms.
