Using Home Equity to Purchase a New Home: Complete Guide

You can absolutely use home equity to purchase a new home. This strategy allows you to borrow against the ownership stake you've built in your current home to fund a second property purchase, whether it's a vacation home, rental property, or investment flip.

The three primary methods are home equity loans (lump-sum payments), HELOCs (revolving credit lines), and cash-out refinances (replacing your existing mortgage). Most lenders allow you to access 80-85% of your available equity, though some restrictions apply when using these funds as a down payment on a mortgaged property.

This approach offers significant advantages including larger down payments, all-cash offer capability, and preserving your existing mortgage. However, you're putting your primary home at risk as collateral and potentially managing multiple mortgage payments.

Key Insights

• Lender restrictions apply: Some mortgage lenders require home equity funds to "season" in your account for 60-90 days before accepting them as a down payment

• Tax implications matter: Interest on home equity loans used to buy a second property is typically not tax-deductible under current IRS rules
• State laws vary significantly: Texas limits borrowing to 80% LTV, while states like New York charge up to 2% in mortgage recording taxes
• DTI is critical: Your debt-to-income ratio must accommodate your original mortgage, home equity payment, and potentially a third mortgage on your new property
• All-cash offers win: Using home equity for all-cash purchases eliminates seasoning requirements and makes you extremely competitive in hot markets

Can You Use Home Equity to Purchase a New Home?

Yes. You can use home equity to purchase a new home, though lender restrictions and qualification requirements apply.

When you've built substantial equity in your current home, that ownership stake becomes a financial resource you can tap for major purchases. Lenders allow homeowners to borrow against this equity through several financing products specifically designed for this purpose.

Your ability to use home equity for a new home purchase depends on several factors: how much equity you've accumulated, your creditworthiness, your debt-to-income ratio, and whether you're using the funds for an all-cash offer versus a down payment on a mortgaged property. Each scenario has different implications for approval and terms.

How Does Using Home Equity to Buy Another House Work?

Using home equity to buy another house means borrowing against your ownership stake in your current home to fund a second property purchase.

Home equity represents the difference between your home's current market value and what you still owe on your mortgage. If your home is worth $400,000 and you owe $250,000, you have $150,000 in equity.

When you take out home equity financing, you're converting this ownership stake into accessible cash. Your lender provides funds based on a percentage of your available equity, and your home serves as collateral securing the loan. This means if you fail to repay, the lender can foreclose on your property.

The borrowed funds arrive either as a lump sum, a line of credit you can draw from, or as part of a refinanced mortgage with cash back. You then use these funds to purchase your second property, either as an all-cash offer or as a down payment combined with a new mortgage on the second home.

This creates a situation where your primary residence secures two loans: your original mortgage and your home equity financing. If you also take out a mortgage on your second property, you'll be managing three separate loan payments across two properties.

What Are Your Home Equity Access Options?

Three main options let you access home equity: home equity loans, HELOCs, and cash-out refinances.

Home Equity Loans

A home equity loan delivers your equity as a one-time lump sum. You receive the full amount at closing and immediately begin repaying it in fixed monthly installments over the loan term, typically 10-30 years. These loans carry fixed interest rates, so your monthly payment never changes. The lump-sum structure works perfectly for home purchases where you need a specific amount for a down payment or complete purchase.

HELOCs

A HELOC functions like a credit card secured by your home. Your lender approves you for a maximum credit line, and you can draw funds as needed during the draw period (typically 5-10 years). During this period, you usually pay only interest. After the draw period ends, you enter the repayment period (usually 10-20 years) where you pay back principal plus interest. HELOCs carry variable interest rates that fluctuate with market conditions.

Cash-Out Refinances

A cash-out refinance replaces your existing mortgage with a new, larger loan. The difference between your old mortgage balance and the new loan amount comes to you as cash. This option makes sense when current mortgage rates are competitive with your existing rate. You end up with a single mortgage payment instead of your original mortgage plus a separate home equity loan payment.

Comparison Table

Which Should You Choose?

Select a home equity loan when you know exactly how much you need and want predictable payments. Choose a HELOC if you need ongoing access to funds. Consider a cash-out refinance if mortgage rates are favorable and you want to simplify payments into one monthly bill.

Can You Use Home Equity as a Down Payment on Another House?

Yes, you can use home equity as a down payment on another house, but lenders evaluate your debt-to-income ratio carefully and may require the funds to season.

For Mortgaged Purchases

When you apply for a mortgage on your second home while also carrying home equity debt, lenders scrutinize your debt-to-income (DTI) ratio intensely. Your DTI calculation must include your original mortgage payment, your new home equity loan payment, and the proposed mortgage payment on your second property. Use a mortgage calculator to estimate your combined monthly payments before applying to ensure you stay within acceptable DTI limits.

Most lenders require a DTI below 43% for conventional loans, though some allow up to 50% with strong compensating factors. Some lenders require home equity funds to "season" in your bank account for 60-90 days before counting them as verified assets for a down payment. Not all lenders impose seasoning requirements, particularly if you're transparent about the source of funds.

For All-Cash Offers

Using home equity for an all-cash purchase eliminates many restrictions. You're not applying for a mortgage on the second property, so there's no mortgage lender to question your funding source or require seasoning periods. You simply close on your home equity financing, receive the funds, and use them to make a cash offer. This approach makes you an extremely competitive buyer.

What Are the Advantages of Using Home Equity?

Using home equity to purchase a new home offers four significant benefits that can make you a more competitive buyer while preserving your financial flexibility.

Make Larger Down Payments

A substantial down payment on your second property immediately improves your mortgage terms. Putting 20% or more down eliminates private mortgage insurance (PMI), reduces your monthly payment, and often qualifies you for better interest rates. If you've built $150,000 in equity but only have $30,000 in liquid savings, tapping your equity lets you make an $80,000 down payment instead, dramatically changing your purchasing power.

Become a Highly Competitive Buyer

In competitive real estate markets, all-cash offers win. Sellers accept them over higher financed offers because cash deals close faster, face no appraisal contingencies, and carry virtually no risk of falling through. Home equity financing can provide the cash needed to make these compelling offers.

Access Lower Interest Rates Than Alternatives

Home equity financing carries significantly lower interest rates than unsecured alternatives like personal loans or credit cards. While personal loan rates often range from 8-15%, home equity loans and HELOCs typically offer rates between 6-10%, depending on market conditions. This rate advantage exists because your home serves as collateral, reducing the lender's risk.

Preserve Your Existing Low-Rate Mortgage

If you locked in a mortgage rate of 3-4% in previous years, that's an incredibly valuable asset in today's higher-rate environment. Using home equity lets you keep that favorable rate intact instead of refinancing at current rates. Selling your current home to fund a second property purchase means giving up your low-rate mortgage.

What Are the Risks and Disadvantages?

Using home equity to buy another home carries five significant risks you must understand before proceeding.

Your Primary Home Becomes Collateral

This is the most critical risk. Your home equity loan or HELOC uses your primary residence as collateral. If you cannot make payments on this debt, the lender can foreclose on your home. You could lose the roof over your head due to problems with your second property. If your rental property sits vacant, your vacation home needs unexpected repairs, or your investment flip doesn't sell, you still owe your home equity payments.

You're Managing Multiple Mortgage Payments

Most scenarios create three separate monthly obligations: your original mortgage, your home equity financing, and a mortgage on your second property (if you didn't buy with cash). These payments add up quickly. A $250,000 original mortgage might cost $1,500 monthly, a $60,000 home equity loan adds $500, and a $200,000 mortgage on your second home adds $1,200. You're now paying $3,200 monthly in housing costs across two properties.

You're Trading an Asset for Debt

Before tapping your equity, you own a portion of your home outright. When you take out home equity financing, you're converting this asset into debt. Your net worth doesn't change immediately, but you've shifted from owning part of your home free and clear to owing money against it. If property values decline or your second property investment fails, you've increased your financial risk substantially.

Market Declines Can Leave You Underwater

Real estate markets fluctuate. If you tap 85% of your equity and property values drop 15-20%, you could suddenly owe more on your home than it's worth. Being underwater severely limits your options. You cannot sell or refinance without bringing cash to closing. With two properties financed partially through equity, a market decline affects both properties simultaneously, compounding your exposure.

You'll Likely Lose Tax Deduction Benefits

Under current tax law, mortgage interest is only deductible when loan proceeds are used to buy, build, or substantially improve the property that secures the loan. If you take out a home equity loan secured by your primary residence and use the funds to buy a vacation home, that interest is not tax deductible. The mortgage on your second property may be deductible (up to the overall mortgage debt limit of $750,000 for married couples filing jointly), but the home equity financing against your first home likely is not.

Does Using Home Equity to Buy a Home Differ by State?

Yes. State laws affect mortgage recording taxes, equity access limits, and lien procedures when using home equity for another home purchase.

Real estate and lending laws vary significantly by state, creating different costs, requirements, and restrictions depending on where your properties are located.

Mortgage Recording Taxes

Several states charge mortgage recording taxes when you record a mortgage or home equity loan. These taxes typically range from 0.1% to 2% of the loan amount and apply each time you take out mortgage-related financing.

States with significant mortgage recording taxes include:

• New York: 1.8-2.05% in most counties
• Florida: 0.35% of loan amount
• Tennessee: 0.115% of loan amount
• Delaware: 2-3% depending on county

If you live in New York and take out a $75,000 home equity loan, you could pay $1,350-$1,538 just in recording taxes. If you're simultaneously taking out a mortgage on your second property in New York, you'll pay this tax again on that loan amount.

Texas Constitutional Restrictions

Texas has unique constitutional protections that significantly restrict home equity lending. The state constitution limits home equity loans and HELOCs to 80% of your home's value (compared to 85-90% in many other states) and requires a 12-day waiting period between application and closing. Many Texas lenders also impose restrictions on how you can use home equity funds.

If you're buying in Austin or elsewhere in Texas, working with professional Austin realtors who understand these state-specific restrictions can help you navigate the timing and requirements more effectively.

Community Property States

Nine states follow community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. When taking out home equity financing in these states, both spouses typically must consent and sign the loan documents, even if only one spouse holds title to the property.

Key State Considerations

Before proceeding, research:

• Whether your state charges mortgage recording taxes and the rate
• Maximum loan-to-value ratios permitted for home equity financing
• Foreclosure procedures and timelines in case of default
• Community property laws if you're married

Your lender can provide information specific to your state, but consulting with a real estate attorney ensures you understand all legal implications.

How Much Home Equity Can You Access?

Most lenders allow you to access 80-85% of your home's value minus your current mortgage balance, though your actual borrowing power depends on credit score, income, and debt-to-income ratio.

The Basic Calculation

Lenders use this formula: (Home's Current Value × Maximum LTV) - Current Mortgage Balance = Available Equity

Here's how this works in practice:

• Your home's current value: $400,000
• Lender's maximum LTV: 85%
• Maximum combined loan amount: $340,000
• Your current mortgage balance: $250,000
• Available equity to borrow: $90,000

Credit Score Impact

Your credit score dramatically affects both approval and borrowing amount:

• 740+: Access to maximum LTV ratios and best interest rates
• 700-739: Most lenders approve at standard LTV limits with competitive rates
• 660-699: May face reduced LTV limits (75-80%) and higher rates
• Below 660: Difficulty qualifying with lowest LTV limits

Debt-to-Income Requirements

Most lenders require DTI ratios below 43% for home equity financing, though some allow up to 50% with strong credit. Your DTI calculation includes your current mortgage payment, new home equity loan payment, all other debt obligations, and potentially a second mortgage payment if you're buying another property.

Example Scenario

If you earn $120,000 annually ($10,000 monthly):

• Current mortgage payment: $1,800
• Other debt payments: $600
• Current DTI: 24%
• Maximum allowable DTI: 43%
• Available debt capacity: $1,900

This $1,900 monthly capacity must cover both your home equity financing payment and potentially a mortgage payment on your second property. If a $75,000 home equity loan costs $625 monthly, you have $1,275 left for a second mortgage payment.

What's the Step-by-Step Process?

Follow this eight-step process to use home equity for purchasing a new home, allowing 60-90 days from start to finish.

Step 1: Calculate Your Available Equity

Determine your home's current market value and multiply by 80-85%, then subtract your remaining mortgage balance. This gives you a realistic budget before you start house hunting.

Step 2: Compare Lender Options

Shop among banks, credit unions, and online lenders. Request quotes from at least three lenders, comparing interest rates, loan-to-value limits, closing costs, and any restrictions on fund usage. Ask specifically whether the lender has restrictions on using funds for a second property purchase.

Step 3: Apply for Home Equity Financing

Submit your application with required documentation including photo ID, proof of income, current mortgage statement, recent bank statements, and property information. The lender will pull your credit report.

Step 4: Complete the Appraisal

Your lender orders an appraisal of your current home to verify its value (typically $300-$600). The appraisal determines your actual loan-to-value ratio and confirms how much equity you can access.

Step 5: Close on Your Home Equity Loan

Review your closing disclosure carefully. At closing, you'll sign loan documents and pay closing costs (typically 2-5% of the loan amount). You receive funds within 3-5 business days for home equity loans, or immediately for HELOCs.

Step 6: Season Your Funds (If Required)

If using funds as a down payment and your mortgage lender requires seasoning, deposit funds in your bank account and wait 60-90 days. The funds must remain in your account and show up on consecutive monthly statements.

Step 7: Make Your Offer on the Second Property

Begin your search for your second property. Make your offer with confidence, knowing you have verified funding. Cash offers often succeed even when lower than financed offers because sellers value certainty.

Step 8: Close on Your Second Home

Navigate the standard home buying process: inspection, title search, final walkthrough, and closing. At this closing, you'll pay your down payment (funded by your home equity) and closing costs on the new property.

When Should You NOT Use Home Equity for a Home Purchase?

Avoid using home equity to buy another home in four specific situations where the risks outweigh the benefits.

Your DTI Ratio Is Already High

If your current debts consume 35% or more of your gross monthly income before adding home equity payments, you're operating with minimal margin for error. A single unexpected expense could cascade into missed payments and foreclosure risk. Wait until you've reduced existing debt or increased income before taking on additional mortgage obligations.

You Have Limited Equity Cushion

Borrowing 85% of your home's value leaves only a 15% equity cushion. Markets can swing 10-20% relatively quickly during economic downturns. If you bought your home recently and haven't built substantial equity, maxing out your borrowing leaves you extremely vulnerable. Consider limiting borrowing to 70-75% of your home's value.

Your Income Is Uncertain

Commission-based sales roles, contract work, seasonal employment, or recent business launches create income volatility. If you cannot confidently predict your earnings for the next several years, taking on substantial additional debt is risky. If there's meaningful risk your income could drop 20-30%, the debt burden of multiple properties could become unmanageable quickly.

The Market Is at Peak Valuations

If your area has experienced rapid appreciation (20%+ over 2-3 years) and prices feel elevated relative to local incomes and rents, buying a second property at peak valuations increases your risk of purchasing before a correction. Combining peak-price purchases with substantial leverage against your primary home compounds this risk.

What Are the Alternatives to Using Home Equity?

Four alternative financing methods can fund a second home purchase, each with distinct advantages and drawbacks.

Traditional Mortgage with Savings

Using liquid savings for your down payment and taking out a standard mortgage on the second property is the most straightforward approach.

Advantages: Your primary home isn't at risk, you avoid home equity closing costs, the second property secures only its own mortgage.

Disadvantages: Requires substantial liquid savings, depletes emergency funds, may prevent you from buying as much house.

Best for: Buyers with $40,000-$100,000+ in liquid savings who want to minimize risk to their primary residence.

401(k) Loan

Many employers allow you to borrow from your 401(k), typically up to 50% of your vested balance with a $50,000 maximum.

Advantages: No credit check required, interest paid goes back into your own account, five-year repayment period, no tax penalties if repaid on schedule.

Disadvantages: Missed investment growth while funds are borrowed, full repayment required within 60 days if you leave your job, reduces retirement savings.

Best for: Buyers needing $20,000-$50,000 for a down payment who have stable employment and strong 401(k) balances.

Personal Loans

Unsecured personal loans from banks, credit unions, or online lenders can provide $10,000-$100,000 depending on your creditworthiness.

Advantages: No collateral required so your home isn't at risk, faster approval than home equity financing, fixed repayment terms.

Disadvantages: Much higher interest rates (8-15%+), lower borrowing limits, shorter repayment terms (3-7 years typically).

Best for: Buyers needing smaller amounts ($10,000-$30,000) for a down payment who have excellent credit and want to avoid home equity complications.

Cash-Out Refinance as Complete Replacement

Instead of a home equity loan as a second mortgage, refinance your entire first mortgage at a higher amount and take the difference in cash.

Advantages: One monthly payment instead of two, potentially lower interest rate than home equity loans, simplifies debt structure.

Disadvantages: Only makes sense when current mortgage rates are competitive with your existing rate, extends your loan term.

Best for: Buyers who bought or refinanced when rates were higher than current rates, or those who want to simplify their payment structure.

Comparison Summary

Should You Use Home Equity to Buy Your Next Property?

You can use home equity to purchase a new home through home equity loans, HELOCs, or cash-out refinances, accessing up to 80-85% of your accumulated equity to fund down payments or all-cash offers. This strategy makes you a more competitive buyer and lets you preserve your existing mortgage and liquid savings. However, this approach carries significant risks including putting your primary residence at risk as collateral, potentially managing three mortgage payments across two properties, and converting an asset into debt.

This financing method makes the most sense when you have substantial equity (at least 30-40% of your home's value), strong and stable income, low existing debt, and are buying in a property market you understand well. Before proceeding, carefully calculate your debt-to-income ratio with all payments included, research your state's specific regulations and costs, compare alternatives, and ensure you maintain a financial cushion for unexpected expenses.

Ready to Find Your Next Austin Property?

If you're considering using your home equity to purchase a second home or investment property in Austin, Spyglass Realty can help you navigate the local market with confidence. Our experienced agents understand the unique opportunities in Austin's diverse neighborhoods and can guide you through the entire buying process, from making competitive offers to closing on your dream property.

Contact Spyglass Realty today to explore available homes in Austin and discover how your home equity can help you secure the perfect second property in one of Texas's most dynamic real estate markets.

FAQs About Using Home Equity to Purchase a New Home

Can I use a HELOC to buy another house?

Yes, you can use a HELOC to buy another house. A HELOC provides a revolving line of credit secured by your home that you can draw from for a down payment or all-cash offer. However, HELOCs carry variable interest rates, and some lenders may require the funds to season in your bank account for 60-90 days if using them as a down payment.

Does using home equity for a second home affect my taxes?

Yes, using home equity for a second home significantly affects your taxes. Under current IRS rules, home equity loan interest is only tax-deductible when loan proceeds are used to buy, build, or substantially improve the property that secures the loan, so interest on equity borrowed against your primary home to buy a vacation property is not deductible. The mortgage on your second property itself may be deductible up to the combined debt limit of $750,000 for married couples filing jointly.

Can I use home equity to buy an investment property?

Yes, you can use home equity to buy an investment property, though you may face additional scrutiny from lenders. Many traditional banks restrict home equity financing to primary residences or second homes, but standalone mortgage companies and some online lenders specifically allow home equity funds for investment property purchases. Make sure your investment property generates sufficient income to cover its expenses plus your home equity payments, as rental income isn't guaranteed.

What happens to my home equity loan if I sell my house?

If you sell your house, you must pay off your home equity loan from the sale proceeds because it's secured by your property. At closing, the title company pays off your primary mortgage first, then your home equity loan or HELOC, with any remaining proceeds going to you. For example, if you sell for $400,000 and owe $200,000 on your mortgage plus $60,000 on a home equity loan, you'll receive $140,000 minus closing costs.

Are there state restrictions on using home equity to buy another home?

Yes, several states impose restrictions through constitutional provisions, recording taxes, and lending regulations. Texas limits home equity borrowing to 80% loan-to-value, while states including New York, Florida, Tennessee, and Alabama charge mortgage recording taxes of 0.1-2% on home equity loans. Community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin) require both spouses to consent to home equity loans regardless of whose name is on the title.

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