A home equity line of credit (HELOC) is a type of loan that uses your house as collateral while allowing you to borrow money based on the equity you have in your home.
People typically opt for a HELOC instead of a traditional loan because a HELOC offers a comparatively lower interest rate. With a HELOC, you can borrow as much as you need—up to your credit limit—whenever you need it, making it a flexible and on-demand source of money.
You can get a HELOC on a second home or investment property if you don’t want to put up your primary residence as collateral. However, the rules and limitations for securing a HELOC in this way are different.
- A home equity line of credit uses your house as collateral when you borrow money, which means the house could be seized if you can’t make loan payments.
- HELOC payments work like a credit card, letting you borrow as much as you need within a set limit.
- HELOCs can come with additional expenses, such as closing costs, annual fees, and more, so there may be less-expensive ways to raise the funds you’re seeking.
- Alternatives to HELOCs include personal loans and cash-out refinancing.
How To Get a HELOC on a Second Home
You can get a HELOC on a second home or any other property you own. The first step in getting a HELOC on a second home is to ensure you meet all the requirements. The requirements differ with each type of lender, so it’s best to do your homework before signing any paperwork.
Some common requirements include:
- Debt-to-income (DTI) ratio should be 43% or below
- A minimum 700 credit score
- At least 20% equity in the second home
Many local banks and credit unions offer HELOCs on second homes, so if you don’t meet the requirements of one lender, try another. You also can try borrowing online from HELOC lenders.
Shop around and apply to borrow from multiple lenders so you have several offers to compare and choose from.
Drawbacks of a Second-Home HELOC
While getting a HELOC on a second home may feel like a safer form of collateral for the borrower, it’s considered more risky by lenders.
HELOCs on second homes are viewed this way because people often prioritize their primary residences when it comes to making mortgage payments. That’s why the interest rates for second-home HELOCs tend to be comparatively higher.
The lending rules are also stricter. For example, you can get a primary-home HELOC with a minimum 620 credit score, but most second-home HELOCs require a 700 or higher credit score.
Moreover, there may be additional fees and closing costs associated with a second-home HELOC, which makes it a more-expensive option compared with other means of financing.
Buying a Second Home With a HELOC
Because HELOCs usually offer lower interest rates than traditional loans, some people opt to buy a second home using a HELOC tapping their first home’s equity. However, this isn’t a good idea.
Using your primary residence as collateral is always a big risk, especially if a first-home HELOC is your only financing option. In the event that you’re unable to repay the loan, you risk losing the roof over your head and having no money to replace it.
HELOCs also come with a lot of transaction fees, annual fees, and closing costs, which eat into any savings you’re gaining by not choosing a traditional loan.
Alternatives to a HELOC on Your Second Home
A HELOC on a second home may be a good option for some, but it has some negatives, making it unsuitable for many. Here are alternative financing options to consider.
HELOC on Your Primary Residence
Establishing a HELOC on your primary residence usually is easier and saves you more money than a second-home HELOC. The requirements and limitations are fewer, making it a more-accessible option for those with a lower credit score or a higher DTI ratio.
Personal loans are one of the most popular and reliable ways to obtain cash urgently. Almost every bank and lender offers personal loans with varying rates of interest. You can use these funds for any purpose, so you get flexibility in terms of the amount you’re allowed to borrow for your spending needs.
Cash-out refinances involve refinancing your primary mortgage for a higher amount than you owe, and receiving the difference in a lump sum. For example, if you owe $150,000 on your current mortgage and refinance it for $250,000, you receive $100,000.
Cash-out refinances have higher closing costs than HELOCs, so it’s best to consider whether you will come out ahead before choosing this option.
Frequently Asked Questions (FAQs)
How much can I borrow with a HELOC?
A HELOC's value is usually based on the amount of home equity you have and your credit score. The more equity you have and the higher your credit score, the more money you likely can borrow. While the exact amount varies from lender to lender, most will let you access up to 80% of your equity amount.
How do HELOC payments work?
HELOC payments work like credit cards. You can draw funds up to a set limit (similar to a credit limit), which you have to pay back with interest. You can borrow as much money as you need, whenever you need it, as long as the withdrawal is within the limit and your house is still considered qualified. During this period, your house is considered collateral; your assets may be seized if you’re unable to repay the money.
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