How to get a HELOC or home equity loan on a second home

October 21, 2022 - 5 min read

Put your second home equity to work

According to CoreLogic, the average homeowner had nearly $300,000 in home equity by mid-2022. If you own a second home or vacation home in a sought-after area, you may have seen even bigger equity gains than average. But what happens if you want to tap that equity?

Can you take out a home equity loan or HELOC on your second home? The answer is likely yes, but the rules are a little different than for your primary home. Here’s what to expect.

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How to access equity in a second home

You don’t have to sell your vacation home to access the equity it’s built up. Instead, you can tap the home’s value using a cash-out refinance, home equity loan, or home equity line of credit (HELOC).

Cashing out on a second home can be more appealing than changing the mortgage on your primary home or reducing its equity. Using your second home lowers the risk of being in a negative equity position with your primary residence should the market take a turn for the worse.

Fortunately, many lenders and banks now offer home equity loans and HELOCs on second homes. The guidelines are a little more stringent than when you take out a loan on your primary home, but it can be done.

Home equity loan vs. HELOC on a second home

If you already have a low fixed rate on your existing loan, a second mortgage is probably a better option than a cash-out refinance. A home equity loan or HELOC lets you preserve the low rate and payment on your existing mortgage while still withdrawing home equity.

Plus, you won’t have to start your original loan term over and extend the total amount of time you’re paying interest. This can make a second mortgage more appealing to someone who’s nearly done paying off their existing mortgage balance.

Deciding between a home equity loan or HELOC can be complex, so you’ll want to do your research. But here are the basics:

  • Home equity loans involve taking a lump sum from your home equity, which you typically pay back over a set repayment period at a fixed interest rate
  • Home equity lines of credit involve taking out a revolving line of credit, secured by your home’s equity, which you can borrow from and repay as often as you want within a set draw period. After the draw period ends, you’ll have a set amount of time to make payments until the loan amount is paid in full. HELOCs typically have variable rates

Both these options are second mortgages — meaning you’re taking out a new loan on top of your existing mortgage loan. You’d then have two monthly payments, likely to two different lenders

How to get a second home HELOC or home equity loan

Due to the elevated risk that second homes pose for lenders, second-home financing typically comes with higher interest rates and stricter financing rules.

Buying a second home involves a higher down payment of 10% or more. If you’re refinancing a second home you already own, you’ll need enough equity to make cashing out worth it.

You often need to leave at least 25% of your second home equity untouched, which means you’ll need significantly more than 25% equity to make a cash-out refinance or home equity loan worth your while.

Depending on the lender and loan program, you may sometimes face an even higher equity threshold. Additionally, credit score requirements are higher on second homes, and debt-to-income ratio guidelines are stricter. Additional qualifications may include:

  • Owning the property for at least one year
  • Higher credit scores (often 680-700+)
  • Bigger down payments, resulting in lower loan-to-value ratios (LTVs)
  • Restrictions on geographic location

The good news is that second home mortgage rules are more lenient than those for investment properties. So it will be easier to find lenders offering home equity loans and HELOCs on your vacation home than on an investment or rental property.

Alternatives to a HELOC on your second home

Fortunately, even though there are stricter requirements, you won’t be forced into just one loan option in order to access the equity in your second home. From a home equity loan to a home equity line of credit or a cash-out refinance, you have options. Whether or not you should opt for a cash-out refinance or a home equity loan will depend on your specific situation.

Cash-out refinance

If you have an above-market rate on your current mortgage, cash-out refinancing could help you withdraw equity and reduce your interest costs at the same time. Because a cash-out refinance is a “first mortgage” or “traditional mortgage,” it will typically have a lower interest rate than a home equity loan or line of credit, both of which are second mortgages.

Just note, the rules for a cash-out refinance on a second home will be more stringent than cashing out a primary residence. Expect to have higher interest rates, increased equity requirements, and higher minimum credit scores. In addition, closing costs are typically higher for cash-out refinancing than for a second mortgage.

Personal loans

Personal loans are a popular means of borrowing cash quickly. Similar to cash-out refinancing and HELOCs, personal loans provide cash to be used for just about anything, including home improvements, school tuition, paying down credit card balances, and general debt consolidation — all without having to use your second home as collateral and risk foreclosure. But personal loans often carry higher interest rates. This is why they are often considered a last resort for homeowners.

Why are HELOC rules different for second homes?

Prior to the housing downturn of 2008, homeowners could easily tap into home equity — and with very little equity at that. But after 2010, mortgage lenders began to pull back on those loose guidelines. Instead of loaning up to 100% of your home’s equity with relatively few credit requirements, many lenders stopped offering home equity loans of any type on second homes.

Why? Unlike your primary residence, home loans for vacation properties are a higher risk for lenders.

  • Your primary residence is considered to have the least risk when it comes to real estate. The home where you live is most likely the one debt that gets paid, regardless of tough times
  • Vacation homes are considered riskier. If times get tough, homeowners are more likely to forego those mortgage payments when money is short

On top of that, second mortgages — including HELOCs and home equity loans — are already considered higher risk. That’s because these loans fall into a second lien position (behind your first mortgage), meaning they could get paid less or not at all in the event of a foreclosure.

With the dual risk factors of a second mortgage on a second home, lenders are naturally more reserved about offering these loans and charge higher interest rates when they do.

Don’t forget to shop around for interest rates

Buying a vacation home means you can enjoy the financial benefits of owning real estate, as well as having a great place to vacation with your family. Mortgage borrowers will find different lending standards for different types of property, depending on the lender and the mortgage program.

Remember to always shop and compare loan options for your specific needs and financial goals. If you can’t find a lender that can help you, try a smaller, local bank or credit union.

Craig Berry
Authored By: Craig Berry

The Mortgage Reports contributor

With over 20 years in mortgage banking, Craig Berry has helped thousands achieve their homeownership goals.