Can you use a HELOC for a down payment?

Yahoo

a day ago

If you have enough equity in your home, you may be able to tap into it using a home equity line of credit, or HELOC. Before using a HELOC for a down payment on a second home or investment property, it's essential to know how it works, its benefits, and the associated risks.
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Homeowners can use the equity from their primary residences for a down payment on a vacation home or investment property. However, you'll need sufficient equity to qualify.
A home's equity is its value minus the outstanding mortgage. For example, if a property appraises for $500,000, and the outstanding mortgage balance is $300,000, the equity is $200,000, or 40%.
When determining your eligibility, lenders will consider your equity, credit score, debt-to-income (DTI) ratio, and income. Here are some of the typical HELOC requirements you can expect.
Enough home equity: Homeowners typically need 15% to 20% equity in their home to meet lender requirements.
Good credit score: Many lenders want a minimum credit score of 680, but the higher the better.
Low DTI: Ideally, a DTI of 45% or lower signals to lenders that you can manage your debt.
Sufficient income: Stable income and employment communicate to lenders that you can repay the HELOC balance.
A HELOC is a line of credit that works like a credit card. When buying a second home, you can use HELOC funds for the down payment, closing costs, or other expenses up to your approved credit limit.
You usually have 10 years to withdraw from your HELOC. During this period, you're typically only required to make interest-only payments.
Once the draw period ends, you can no longer access your line of credit. In the repayment period, you'll make full interest and principal payments until the balance is paid off, typically over 20 years.
If you need to borrow money to come up with cash for a down payment, HELOCs can be more affordable than other loans or lines of credit. Here are a few of their advantages.
Potentially lower interest rates: HELOC rates are typically lower than those for credit cards and personal loans, allowing you to borrow money for less.
Access funds as needed: You can withdraw from the HELOC as often as needed during the draw period.
Lower payments up-front: Lenders usually require interest-only payments during the draw period, which can be much lower than the minimum payments for other loans.
May be tax-deductible: You may be able to deduct HELOC interest if you use the money to purchase a second home, but you'll have to meet other IRS guidelines.
A home equity line of credit can be risky, primarily because your home is collateral. Here are a few of the disadvantages to consider.
Variable interest rate: Most HELOCs have variable interest rates that fluctuate depending on the economy. Payments on variable-rate loans can be harder to predict or plan for.
May require closing costs: Lenders may charge closing costs that cover originating, underwriting, and processing the loan. HELOCs can also have additional charges, like account management fees or early cancellation penalties.
Easier to overspend: You may be tempted to use your credit line for more than you need to, especially if you only make the minimum interest-only payments.
Default risks foreclosure: Your home is collateral for a HELOC. So, if you have trouble repaying the balance, the lender can foreclose on your home.
Borrowing from your home's equity to buy a second home could make sense, but only if you can withstand the financial risk.
'There's a compounded risk of increased rates and a strained cash flow, so a HELOC is best for well-income homeowners, with healthy reserves, and a plan to refinance or pay it off early — ideally within 12 to 24 months,' said Randall Yates, investment specialist at VA Loan Network, via email. 'Where it doesn't work is if you live on a tight budget, especially when rates are volatile, or you're buying a property that already pushes your DTI limits.'
Consider these alternatives if using a HELOC for a down payment isn't right for you.
Home equity loan: Access your home's equity in a lump sum, typically repaid at a fixed interest rate. Bridge home equity loans delay repayment until you sell the home.
Cash-out refinance: Refinance your current home loan, borrowing the existing mortgage balance plus cash from your equity that you can use toward a down payment on a second home.
Personal loan: Most personal loans are unsecured, meaning you can borrow a lump sum and repay over a fixed period without collateral.
You can use a HELOC to make a down payment on a second home or investment property. You'll likely need 15% to 20% equity and meet other borrower requirements, like a good credit score, low DTI, and stable income.
HELOCs are lines of credit, allowing you to access your home equity for the down payment and fees, up to your approved credit limit. You usually have 10 years to access your HELOC funds. During this draw period, you can make interest-only payments. Once you're in repayment, you'll make principal and interest payments until the balance is paid off.
A HELOC could be a suitable option for homeowners with significant equity in their primary residence. With lower rates than personal loans and interest-only payments up-front, a HELOC is often a more affordable way to borrow, but only if you can keep up with the payments. If you're unable to repay the HELOC, you could lose your primary residence.