Using a HELOC for a Vacation Property Down Payment

Are you planning to buy a vacation home? Consider using the equity you have built up in your current property to fund the purchase.

With a HELOC, you can tap into your existing equity and use the funds however you choose – including as a down payment or a cash purchase of a vacation property.

Connect with a lender to see if you qualify to buy a vacation property.

Why Use a HELOC to Purchase a Vacation Home?

HELOCs can be an excellent tool to buy a second home or vacation property.

1. Interest-Only Payments – HELOCs have two phases: the draw period and the repayment period. The draw period, which lasts up to 10 years, generally allows you to make interest-only payments on your loan. This could result in a lower monthly cost than a traditional mortgage.

2. Faster Funding – It's not uncommon for a purchase loan to take a month or longer to fund. Paying for your vacation home with a HELOC means closing quickly, without the red tape of traditional mortgages. Plus, it’s possible to open your HELOC in as few as two weeks.

3. More Competitive Offers – You may be able to submit a cash offer for your second home using HELOC funds.

4. Comparable Interest Rates – Mortgage rates are higher for second homes than for primary residences. Depending on your situation, you may be able to get a primary residence HELOC with an interest rate comparable to, or just slightly higher than, a second home mortgage.

Note: The HELOC payment will raise your debt-to-income ratio. Make sure you will qualify for the vacation home with the HELOC before tapping your home’s equity.

How Large of a HELOC Can You Qualify For?

Several factors determine how large of a HELOC you qualify for such as:

• The value of your home

• How much you owe

• The lender’s maximum loan-to-value (LTV)

• Your credit and financial profile

Most lenders allow you to borrow between 80% and 85% of your home's total value. Some local banks and credit unions offer up to 100% LTV HELOCs to well-qualified borrowers.

To calculate the size of a HELOC you may qualify for, take your home's current value, multiply it by your lender's maximum LTV, and then subtract any existing mortgage.

Example

Qualifying for a HELOC takes more than home equity. Lenders have minimum credit and financial requirements to meet. In some cases, you won’t be able to borrow as much as you need for the vacation property.

Using a HELOC for a Down Payment or the Entire Purchase?

If you have enough equity in your home, you could use a HELOC for the entire second home purchase. If not, you can use it to fund the down payment while getting a transition mortgage on the property itself.

Advantages of Fully Funding Your Vacation Home With a HELOC

Some advantages of funding your entire purchase with a HELOC can include:

• Quicker closing

• Less paperwork

• Lower closing costs compared to the 2% to 4% of the loan amount for a standard mortgage

• More competitive cash offer

• Interest-only payments with the option to pay principal

• Avoid higher rates for vacation homes implemented by Fannie Mae in 2022

Disadvantages of Using a HELOC for a Vacation Home

On the other hand, a large line of credit isn't without drawbacks:

• Using a HELOC can put your current home at risk

• Interest-only payments can rise dramatically when you reach the repayment period, typically after 10 years

• HELOCs have adjustable rates; your rate could rise

• Lower-rate alternatives may include doing a cash-out refinance on your existing property or financing your vacation home with a traditional loan.

• You might have other unique options, such as borrowing from your 401(k), which could be a source of cheaper and less risky funding.

HELOC vs Home Equity Loan for Purchasing a Vacation Home

The HELOC interest-only payment is lower than paying principal and interest on a home equity loan. But the rate is variable. Plus, you're not reducing your loan balance by making the minimum payment.

Home equity loans are typically fixed-rate and offer a more predictable payment over the long term than a HELOC. While you may be required to pay more each month, at least up front, you're chipping away at your principal balance while you do so.

See HELOC and home equity loan options. Find a lender here.

Would a Cash-Out Refinance Make More Sense?

Some homeowners might refinance their existing loan and cash out their equity rather than take on a second mortgage.

Although cash-out refinances are higher than no-cash-out ones, rates are usually lower than for HELOCs and home equity loans.

A cash-out refinance could be less expensive than a HELOC.

For Example: You have a $350,000 home with an existing mortgage of $75,000. You need $200,000.

Getting a cash-out refinance would wrap your existing mortgage into the new loan. Your new monthly payment on a 30-year $275,0000 mortgage at an example rate of 7% would be $1,830.

Opening a HELOC would leave your existing mortgage in place. With an example rate of 8%, your interest-only payment on a $200,000 line of credit would be $1,300 per month. Combined with your current $600 payment, your monthly total would top $1,900.

Run the numbers for your scenario to see which option makes sense for you.

Purchasing a Vacation Home With a HELOC

For some buyers, a HELOC can be the most practical way to fund the purchase of a vacation home or second property.

But tapping into your home equity might not be your only or best option. Shop around for lenders offering the lowest rates and talk with them to discuss what type of loan would best fit your purchasing needs.