Using a HELOC as a Down Payment on a Second Home

Purchasing a second home can be an exciting venture, offering a new space for relaxation or investment opportunities. Reviewing your options ahead of time for financing this purchase can make the process feel easier to manage.

One financing option to consider is a home equity line of credit, or HELOC. If you’re unfamiliar with it, we recommend reviewing our article on the basics of a HELOC, including what it is, the variety of ways you can use it, and how to know if it’s right for you. Essentially, a HELOC allows you as a homeowner to use the equity you’ve built in your primary home for many purposes, including as the down payment for a second property.

Thoroughly understanding the benefits and considerations of a HELOC is key to making an informed decision. Importantly, you don’t have to make it alone. Our lending professionals are here to help. Even if you’re not ready to apply, we’re happy to answer your questions and help you think it through. Contact us for more information or visit your nearest INTRUST banking center.

Benefits and considerations of using a HELOC to buy a second home

Although there can be many benefits, there are also considerations. One is that using a HELOC as a down payment may ultimately result in three payments: your primary mortgage payment, the mortgage payment for your second home, and your HELOC balance.

Here are a few additional benefits and considerations:

Benefits

• Allows you to access existing equity and preserve your savings. Leveraging the equity you’ve built in your primary home for new investments can help you avoid depleting your savings.
• Could offer a lower interest rate than other types of credit. A HELOC often offers a lower interest rate compared to other financing options, potentially making it a more cost-effective solution.
• Extended draw period. At INTRUST, we offer a 10-year draw period (among the longest you’ll find). As a revolving line of credit, you can use your HELOC, pay it back, and reuse it as many times as you’d like during this period.
• Interest-only payments during the draw period. During the draw period, you are required to make a monthly interest payment on the amount you’ve used, but you are not required to make a monthly payment toward the principal balance until you enter the repayment period.
• Lengthier repayment period. After your draw period ends, you’ll then enter a 15-year repayment period. This is when you’ll make monthly principal and interest payments on your balance. Many people appreciate HELOCs because the repayment period is longer than some loan options.
• Potential tax benefits. Depending on your circumstances and current tax laws, the interest paid on a HELOC may be tax-deductible, offering potential tax savings. Talk with your tax advisor for more information.

Considerations

• Interest rate fluctuations. HELOCs often have variable interest rates, which can increase and lead to higher monthly payments.
• Secured by your primary home. If you default on your HELOC payments, your primary home could be at risk since it serves as the collateral for the loan.
• Risk of overextending yourself. Like a credit card, the revolving nature of a HELOC may result in some borrowers using more funds than they can reasonably pay back, especially if financial circumstances change.

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

Before applying for a HELOC, it can be good to complete a few pre-planning steps. We outline several of these steps in our article on the basics of a HELOC. Clicking the links below will take you directly to that section of the article.

Pre-planning steps

1. Evaluate your financial situation. This includes a health assessment on your current home (such as researching comparable sales, estimating your home equity, and knowing your loan-to-value ratio) and reviewing your expenses, income, and credit history.

Make sure to keep the information and documents you collect from your financial assessment. You’ll need most of it for the HELOC and mortgage application process.

2. Use your financial assessment to determine a realistic purchase price and down payment amount for your second home. Our mortgage calculators can help. Be sure to think about closing costs (which can range from 3 to 5% of the loan amount), property taxes, insurance, maintenance, and possible homeowners association fees.

To qualify for a HELOC, INTRUST requires you to have a combined loan-to-value ratio (CLTV) of 80% or less. This means that your current mortgage balance combined with your potential HELOC balance, must not exceed 80% of the total value of your property.

3. Understand the HELOC repayment timeline. You’ll want to factor this into your current budget if you plan to make principal payments (in addition to the required interest payments) during the draw period, or factor it into your future budget if you plan to make payments when the formal repayment period starts.
4. Gather what you’ll need to apply for a HELOC, including proof of income, property information, debt information, and valid ID documents.
5. Apply for a HELOC. Easily and securely apply for a HELOC online in minutes. You can also visit the nearest INTRUST banking center to apply in person.

Securing your second home

1. Research homes and talk with local real estate professionals. Our experienced mortgage lenders serve a variety of areas around the region. Learn more about who we are and the areas we serve.
2. Get pre-qualified for a second mortgage. Quickly get pre-qualified with INTRUST by filling out a preliminary version of our mortgage application. We’ll pull your credit report and complete an initial evaluation. If everything looks good, we’ll send you a letter of pre-qualification that you can use to begin actively searching for homes and making offers.
3. Know what documents you’ll need for formal loan processing. In addition to typical information like pay stubs and bank statements, you’ll also be asked to include details about your primary residence and your outstanding mortgage balance.
4. Stay in contact with your mortgage lender and real estate agent so they can help you move through the closing timeline and funding process.

Researching, asking questions, and completing the pre-planning steps will help you more confidently navigate the dual journey of securing a HELOC and purchasing your second home. Remember, our knowledgeable professionals can guide you every step of the way. Let us know how we can help.

1. Unless an appraisal is necessary, which may result in a fee ranging from $0 to $1,000 and an appraisal vendor fee ranging from $0 to $55.00.