Key Takeaways
- Homeowners can borrow against their current home's equity to fund a down payment or purchase price on a new property, typically accessing up to 80–85% of the home's value minus existing mortgage balance.
- The two main options are home equity loans and HELOCs, and each works differently depending on your timeline.
- Qualification generally requires at least 15–20% equity, a credit score of 620 or higher, and a debt-to-income ratio below 43%.
After years of building equity in your current home, you may be considering how to leverage it to purchase your next property. Homeowners often use home equity to buy a new home. This guide explains how home equity loans and HELOCs can fund a new home purchase, what you’ll need to qualify, and how to weigh the benefits against the risks.
In this article (Skip to...)
- Using home equity
- Equity requirements
- Pros and cons
- How to use equity
- HELOC vs home equity loan
- Mortgage approval impact
- FAQs
Can you use home equity to buy another house?
Yes, if you have equity in your current home, you can borrow against it to purchase another property. Most lenders allow access to up to 85% of your home’s appraised value, minus your remaining mortgage balance. You can use these funds for a down payment, closing costs, or the full price of a new home.
Compare home equity lenders now. Start hereThere are two primary ways to access your equity: home equity loans and home equity lines of credit (HELOCs).
- A home equity loan provides a lump sum with a fixed rate and repayment schedule.
- A HELOC is a revolving line of credit secured by your home. You can borrow as needed, repay, and borrow again during the draw period, with a variable interest rate.
Both loans use your home as collateral and generally offer lower rates than unsecured loans, but both carry the risk of foreclosure if you cannot repay.
Home equity definition and meaning
Home equity is simply the difference between your home’s current market value and your remaining mortgage balance. So if your home is worth $400,000 and you owe $250,000, you have $150,000 in equity.
How much equity do you need to buy a new house?
Lenders won’t let you borrow the full amount of your equity. Instead, they use something called the combined loan-to-value ratio (CLTV) to determine your borrowing limit. CLTV measures your total mortgage debt, including the new home equity loan, against your home’s value.
Check your home equity options. Start hereHow to calculate your available equity
Start by estimating your home’s current market value. Then subtract what you still owe on your mortgage. That’s your total equity.
- To find your borrowable equity, you’ll need to factor in the lender’s CLTV cap. For example, say your home is worth $500,000, and you owe $300,000. If your lender caps CLTV at 80%, you can borrow up to $100,000.
- Here’s the math: $500,000 × 80% = a maximum total debt of $400,000. Subtract your $300,000 mortgage, and you're left with $100,000 in borrowable equity.
Typical lender CLTV limits
Most lenders cap CLTV between 80% and 90%. The exact limit depends on the lender, the loan type, and your credit history. Borrowers with excellent credit often qualify for higher limits, while others may face more conservative caps.
Comparing lenders is important. A lender offering 85% CLTV may provide significantly more borrowing power than one capped at 80%.
Benefits of using your equity to buy a new house
Using your equity may be beneficial if you have a low rate on your current mortgage and want to retain it. Key advantages include:
- You keep your existing low-rate mortgage while accessing cash for a new purchase. A home equity loan or HELOC lets you borrow without refinancing into today’s higher rates.
- You often pay far less interest than you would with unsecured debt, since credit cards can charge 20% or more, while home equity loans commonly fall in the 7–10% range.
- You can apply the funds to any purchase-related expenses, including a down payment, earnest money, closing costs, or moving expenses.
- You may qualify for a tax deduction on interest if you use the funds to buy, build, or substantially improve a qualified residence. A tax professional can confirm whether your situation qualifies.
Risks of using your equity to buy a new home
Every loan has trade-offs. Before borrowing against your home, carefully consider the potential drawbacks.
- You put your current home at risk because the lender can foreclose if you fall behind on payments, even if you stay current on your first mortgage.
- You add another monthly payment to your budget, in addition to your existing mortgage and a future mortgage for the new home.
- You pay closing costs and fees that typically range from 2% to 5% of the loan amount, including appraisal, origination, title, and recording charges.
Tip: Some lenders offer no-closing-cost home equity loans, but these often come with higher interest rates to offset the waived fees. Compare both options to determine which is more cost-effective over time.
How to use home equity to buy a new home
If you are ready to buy a home using your equity, follow these steps from calculation to closing.
Explore your home equity options. Start here1. Calculate your available home equity
Estimate your home’s current market value using recent comparable sales or an online valuation tool. Subtract your remaining mortgage balance to find your total equity, then apply your target lender’s CLTV limit to see how much you can realistically borrow.
2. Shop and compare lenders
Compare rates, CLTV limits, fees, and approval timelines from at least three to five lenders. Credit unions, online lenders, and traditional banks each offer distinct advantages.
3. Apply and submit documentation
Once you’ve chosen a lender, you’ll typically need to provide:
- Proof of income (pay stubs, W-2s, tax returns)
- Current mortgage statement
- Property information and a recent appraisal or estimate
- Credit authorization
The lender will order an appraisal to confirm your home’s value and verify your equity.
4. Close on your home equity loan or HELOC
Closing typically takes two to six weeks. You’ll sign loan documents, pay any closing costs, and establish access to your funds. With a home equity loan, you will receive the lump sum shortly after closing. With a HELOC, you will have a line of credit to draw on as needed.
5. Use funds toward your new home
Once your loan closes, you can apply the funds toward your new home’s down payment, closing costs, or purchase price. Having cash in hand can make your offer more competitive, especially in a competitive market.
Compare home equity lenders now. Start here
HELOC vs home equity loan for buying new property
Both products tap your equity, but they work in different ways. Here’s how to compare the pros and cons of HELOCs vs home equity loans.
| Feature | HELOC | Home equity loan |
| Disbursement | Draw as needed during draw period | Lump sum at closing |
| Interest rate | Typically variable | Fixed |
| Payment structure | Interest-only during draw period, then principal + interest | Fixed monthly payments |
| Best for | Uncertain or ongoing funding needs | One-time, known expense |
When a HELOC works best
A HELOC makes sense if you’re not sure exactly how much you’ll need or when you’ll need it. The revolving credit line lets you draw funds as your situation evolves, which is helpful if you’re house hunting and don’t yet know your final purchase price.
When a home equity loan works best
If you know the exact amount needed for a down payment and prefer fixed payments, a home equity loan is often the better option. The fixed rate protects you from rising interest rates, and the lump sum is disbursed when you need it.
How using home equity affects your new mortgage approval
Here’s something many borrowers overlook: taking a home equity loan increases your total debt, which directly affects your debt-to-income (DTI) ratio. When you apply for a mortgage on your new home, lenders will factor in your home equity payment alongside your other obligations.
- Higher DTI: Your monthly home equity payment adds to your existing debt, which could limit how much you can borrow for the new property.
- Credit inquiry: Applying for home equity products triggers a hard credit inquiry, which may temporarily lower your score by a few points.
- Qualification timing: Consider obtaining pre-approval for your new mortgage before or at the same time as your home equity application to understand your full borrowing capacity.
Alternatives to home equity for buying a new house
A home equity loan or HELOC is not the only option. Depending on your situation, one of the following alternatives may be more suitable.
Start tapping your home equity today
Using home equity to buy a new home is a well-established strategy that can provide significant purchasing power, especially if you have built substantial equity over the years. The key is to understand your finances, compare lenders, and select the product that fits your timeline and risk tolerance.
Time to make a move? Let us find the right mortgage for you
FAQs about using home equity to buy a home
When you sell your home, you must pay off both your primary mortgage and your home equity loan at closing. The closing agent uses the sale proceeds to satisfy both balances before you receive any remaining funds. If the sale price does not fully cover what you owe, you must bring cash to closing or work with the lender on a short payoff. You cannot transfer a home equity loan to a new property, since the loan stays tied to the original home.
Most lenders look for a credit score of at least 620, but that score only opens the door. You usually need higher scores to access better rates, higher CLTV limits, and lower fees. Lenders also review your payment history, credit usage, and recent inquiries, not just the number itself. A stronger credit profile gives you more flexibility when you borrow against your home.
You usually close within 2 to 6 weeks of applying. The process includes income review, a credit check, a home appraisal, and title work. You move faster when you submit documents promptly and respond quickly to lender requests. Appraisal availability and local recording timelines also affect how soon you receive funds.
