Can a HELOC be Used to Purchase a Home?

person holding model house

Can a HELOC be Used to Purchase a Home?

The short answer to this question is yes, but the long answer is much more detailed. Many benefits come with using home equity to purchase a home, but there are many considerations involved. As with any mortgage loan or line of credit, you need to consider your ability to afford payments in the future while accounting for potential changes in your income level, interest rates or the housing market. 

Before tapping into a home equity line of credit (HELOC) to finance your second mortgage or purchase investment property, it’s important to be aware of all the risks and benefits involved. 

Using a home equity line to finance a second mortgage is a great way to decrease your overall out-of-pocket costs and help preserve your savings, but it is not without risk. In this post, we will discuss how a HELOC can be used to purchase a home, and some of the most important considerations to take into account before going this route to purchase a home


How Can You Use Home Equity to Buy a Second House?

model house with key on table

First of all, if you are considering buying a second home with a home equity line of credit, you need to ensure that the value of your current mortgage is high enough to be considered reasonable collateral. You also need to meet the requirements of your lender, which will require meeting their credit limit and/or paying a lump sum payment.

Not all financial institutions will accept a home equity line for a second mortgage, so you also need to shop around. A credit union or alternative lender, in some instances many, offers a better fixed rate interest rate than a traditional lender. To be considered for a home equity line, you need good credit, a stable income, and a first mortgage, as well as significant home equity.

Like any other financial product, you should always compare HELOC rates before signing any paperwork to ensure you can meet the payment requirements. Just because you can obtain a home equity line does not mean that you can afford to utilize it in all circumstances. Revolving credit can be harder to budget and navigate, so it is reasonable to have a financial advisor help you analyze multiple lenders to find the best option.


Benefits of Using a Home Equity Line of Credit to Purchase a Home

home ownership concept - series of model houses in a row

One of the top benefits of utilizing a home equity line when purchasing a home is that you will protect your cash flow, which is essential if you are looking at buying a second home as a rental property. Financing the purchase with home equity allows you to keep more cash in your bank account.

Another reason to consider using your home equity to buy a second house is that it can help you with the down payment. Since you don’t need to use your cash to purchase the home, you can afford a larger down payment which will put you on par with some cash buyers depending on the mortgage broker you work with.

However, the top reason why people look at home equity lines is that they often have lower interest rates attached to them versus more traditional ways to borrow money. HELOCs are considered secured loans since the property is attached to them, which means their interest rate is much lower than any other unsecured loans you may obtain.

Finally, a mortgage lender is more likely to approve a second mortgage loan when it is funded by a home equity loan since it is considered a low-risk loan. This can help borrowers who may have trouble getting approved for a second mortgage otherwise.


Cons of Financing a Home with Home Equity 

Of course, while there are many benefits to purchasing a home with home equity, there are also some downsides. The most significant disadvantage of using a home equity line of credit to facilitate a second mortgage is that it puts your primary home at risk. If someone happens and you default on your monthly payments, you will lose the second property and your primary home.

The second issue is that you will end up with multiple payments, which not every homeowner can afford. If you utilize a home equity loan, you could have as many as three loans. Your first mortgage payment, the second home mortgage, and the actual home equity line of credit. It is essential to analyze your personal finance situation carefully to ensure you can afford each loan amount long-term and complete it within the designated repayment period.

Finally, while home equity loans have lower interest rates than personal loans, they are still usually more expensive long-term than traditional mortgage rates. Therefore, you need to know that the loan will cost you more in the long term.

Finally, you must recognize that you will still need to pay closing costs. Closing costs usually range from 2%-5% of the total loan amount based on the property’s market value. You cannot finance the entire purchase price of a home with a home equity loan or line of credit.


Contact John Antle to Learn More About Your Financing Options

Whether you intend to use a home equity loan to purchase a second property or another type of financial product, you need help navigating offerings from various financial institutions. 

A John Antle mortgage broker is your most valuable resource when you’re looking for a home equity loan. Our team is familiar with the offerings of various financial institutions and private lenders in Canada and can help you find the financing that best suits your needs. 

For guidance on how to use a home equity loan to purchase a second property, or any other mortgage-related matter, our team is here to support you and help you reach your goals. Contact us today!

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