• Some of your home equity may be converted into funds for multiple purposes, including buying a second home, vacation home, or investment property.
  • There are three primary means of borrowing from your home equity to buy another home: home equity loans, home equity lines of credit (HELOCs), and cash-out refinancing
  • When deciding whether to use equity to buy another home, it’s important to consider the resulting payment amounts, overall interest expense, and your ability to qualify for your chosen equity-borrowing method. 

If your home is worth more than the balance on your mortgage loan (plus any other debts against the home), you have home equity. Home equity may often be leveraged to provide funding for large expenses or investments, including:

  • Covering unexpected expenses (such as car repairs or emergency medical bills, for example).
  • Financing home improvements or renovations.
  • Consolidating existing debts.
  • Paying for college (if student loans are insufficient).
  • Launching a business.
  • Buying another home. 

This article will focus on how to use home equity to buy another home.

Why Homeowners Might Use Home Equity to Purchase Another Home

For many homeowners, their home is the most valuable asset they own.[1]

After years of ownership, you may have built a substantial amount of equity through paying down your mortgage balance and potentially through an increase in the value of your home. This equity may be a valuable source of funds for purchasing a new home, particularly when:

  • You don’t have enough cash on hand to comfortably cover the down payment plus closing costs on a second property.
  • You want to make a larger down payment to qualify for a lower mortgage interest rate or avoid mortgage insurance (the insurance policy often required when buyers make a down payment of less than 20%).
  • You prefer to keep your cash on hand available for emergencies, other investment opportunities, or home improvements.
  • You want to buy a new home before selling your current home and need funds for the new down payment. 

How Can You Use Home Equity to Buy Another Home?

There are three primary options for using home equity to purchase another property:[2]

  1. Home equity loans 
  2. HELOCs
  3. Cash-Out Refinancing

Here is an explanation of how each method works. 

Home Equity Loans

Home equity loans offer a lump-sum payout at a fixed interest rate.[2]

You borrow against your home equity, using the home as collateral for the loan. This means the lender has the legal right to foreclose on the property if the loan is not repaid as scheduled (just like your primary mortgage).[2] This added protection for the lender allows them to offer lower interest rates than they typically do on loans that are not secured by collateral. And lower rates generally save you money in the long term. 

Repayment of the loan balance, plus interest, begins immediately. Because fixed interest rates are standard on most home equity loans, your repayment amount remains the same each month until the loan is either repaid in full or refinanced.[2]   

HELOCs

HELOCs offer a revolving credit line that you may borrow against as needed during the initial draw period (which typically ranges between three and 10 years from when the HELOC is opened, depending on the lender).[2] This flexibility is particularly helpful for homeowners who aren’t sure how much they’ll need to borrow. For example, if you’re buying a new home that requires renovation, a HELOC might provide funding for the initial down payment, as well as ongoing renovations until you reach the credit limit or the end of the draw period. 

During the draw period, you might have low payments, perhaps even interest-only.[3] The loan balance plus interest is repaid during the subsequent repayment period, which may last 20-30 years, depending on the terms offered by your lender.   

Like home equity loans, HELOCs are secured, using the home as collateral for the loan. Unlike home equity loans, HELOCs often come with variable interest rates, which means repayment amounts may fluctuate over the term of the loan.[2] However, some lenders offer a fixed-rate lock option, which allows borrowers to “lock in” a fixed rate for greater payment stability. 

Learn more about the differences between HELOCs and home equity loans. 

Cash-Out Refinancing

Unlike home equity loans and HELOCs, which do not affect the primary mortgage on your home, a cash-out refinance changes the terms of your primary mortgage.[2]

With a cash-out refinance, you apply for a brand-new mortgage loan with a higher balance than your current mortgage loan. This will allow you to pay off your current mortgage and pocket the difference between the old loan amount and the new loan amount (minus any closing costs), giving you funds for your new home.

Importantly, the new loan comes with its own interest rate and loan term (perhaps starting a new 15 or 30-year loan period).[2] This affects your mortgage payment amount and the overall interest paid on your primary mortgage. As a general rule of thumb, a cash-out refinance makes more financial sense if you’re able to qualify for a lower interest rate today than the rate on your current mortgage.  

Learn more about the differences between cash-out refinancing and HELOCs.

Pros and Cons of Using Equity to Buy Another House

Potential Benefits 

  • Preserving your cash reserves. By borrowing from your home equity, you may keep your cash available for emergencies or other planned expenses.  
  • Access to a potentially large amount of funds. If you have a lot of equity, you could potentially access enough to cover a sizable down payment and closing costs. If your new property is in a substantially more affordable market, you may even have enough equity to cover the full cost of your new home. 
  • Lower interest rates. Because your home is used as collateral for the loan, home equity loans, HELOCs, and cash-out refinances often have lower rates than unsecured personal loans or credit cards.
  • Lower payments. Lower interest rates and longer repayment terms translate to lower monthly payments. Plus, a larger down payment may help you qualify for more favorable interest rates on the new property’s primary mortgage and even avoid mortgage insurance (if you can make a down payment of 20% or more).

Potential Risks and Disadvantages

  • Increased debt. By borrowing against your equity, you’ll owe more overall. You may have to manage multiple mortgage payments, and your total monthly debt obligations may increase, potentially creating greater challenges in managing cash flow. 
  • Risk to your primary home. If you can’t repay the loan, your current home could be at risk of foreclosure.
  • Market risk. If the housing market experiences a downturn, the value of both properties could dip, reducing your overall equity position.
  • Variable rate risk. If you opt for a variable interest rate, an increase in market rates could cause your rate to rise, which could increase your monthly payment amount.

Other Important Considerations

In addition to the pros and cons, the following factors are also worth considering when exploring the use of equity for buying another home.

Property Use

Properties purchased as income-generating investments may have more strict lender requirements than those used as second homes or vacation homes.[4]

Investment properties may require higher down payments, higher interest rates, and greater cash reserves.[4]

Lender Requirements 

Requirements vary by lender and loan product, but often include:

  • Credit score minimums
  • Debt-to-income ratio (DTI) limits
  • Equity retention requirements (meaning that you need to retain a certain amount of equity in the home)[2] 
  • Cash reserve requirements

Tax Implications

For tax years 2018-2025, the interest on home equity loans and HELOCs is typically only tax-deductible when used to improve the property securing the loan.[5] So it would not be tax-deductible when used to purchase another property.

Having said that, if the new home is used as an investment property, the interest expense may be tax-deductible as a business expense.[6]  

Because tax law is highly nuanced and always changing, it is important to consult a tax professional for a personalized assessment of your unique income tax situation. Interest paid may be tax-deductible in some cases, so consult a tax advisor for personalized guidance.

Explore Your Home Equity Options Today

Home equity is a key benefit of homeownership. It may be tapped to cover expenses or fund investments, including buying another property. Whether you’re looking to access funds for the down payment on a new home before selling your current home or expand your real estate holdings, the equity in your current home may be the funding source that helps you achieve your goals.

Still have questions? Connect with a PNC Mortgage Loan Officer (MLO) today by calling 1-855-744-2268. Your MLO can help answer any remaining questions and walk you through every step of the process.