How to Get a HELOC on a Second Home

Can I get a HELOC on a second home?

Yes, it is possible to get a HELOC on a second home, but it's important to understand that the requirements and terms may differ from those for a primary residence.

Cashing out a second home’s value can be more appealing than refinancing the mortgage loan 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 downturn

Fortunately, many lenders and banks now allow homeowners to get a HELOC on a second home. The guidelines are a little more stringent than when you take out a loan on your primary home, but it can be done.

In this article (Skip to...)

• HELOC on a second home
• HELOC requirements
• How to get a HELOC
• Pros and cons
• HELOC alternatives
• FAQ

Understanding HELOCs for second homes

A HELOC on a second home can open up a world of financial possibilities, from funding renovations to building your real estate portfolio.

What is a HELOC?

A Home Equity Line of Credit (HELOC) is a revolving line of credit that allows homeowners to borrow against the equity in their property. Unlike a traditional home equity loan, which provides a lump sum upfront, a HELOC offers a flexible line of credit that you can draw from as needed during a set period, typically 5–10 years.

A HELOC on a second home can be an attractive option for homeowners looking to access funds for remodeling, debt consolidation, or other financial goals. The home serves as collateral for the loan, which often results in lower mortgage rates compared to unsecured forms of borrowing like personal loans or credit cards.

How does a HELOC work?

A HELOC works similarly to a credit card, but with your second home's equity as collateral. Here's how it typically works:

• Draw period: This is usually 5–10 years, during which you can borrow against your credit line as needed. You'll make minimum monthly payments, often interest-only.
• Repayment period: After the draw period ends, you enter the repayment period (typically 10–20 years), where you can no longer borrow and must repay the principal plus interest.
• Variable interest rates: Most HELOCs have variable interest rates, which can fluctuate based on market conditions.
• Credit limit: The value of your home, the amount of equity you have, your credit score, and your debt-to-income ratio all play a role in determining your credit limit. 
• Payments: During the draw period, you only pay for what you borrow, plus interest. During the repayment period, you'll make regular payments to cover both principal and interest.

For a second home, lenders may set lower loan-to-value (LTV) ratios, meaning you might be able to borrow less against your equity compared to a primary residence.

Differences between HELOCs and home equity loans

While both HELOCs and home equity loans allow you to borrow against your home's equity, they have several key differences. 

HELOCs provide a revolving line of credit with variable interest rates, offering flexibility to borrow as needed, while home equity loans offer a lump sum with fixed rates and predictable payments. 

HELOCs typically have lower closing costs and interest-only payments during the draw period, but can be riskier due to variable rates. For second homes, both options may have stricter requirements and higher rates compared to primary residences, so it's essential to compare offers and align the choice with your financial goals.

Eligibility requirements for a HELOC on a second home

When applying for a HELOC on a second home, lenders typically have stricter requirements compared to primary residences. Specific HELOC requirements will vary by lender, but these requirements fall into two main categories:

Financial requirements

• Higher credit score: Lenders often require a credit score of 680 to 700 or higher for a HELOC on a second home.
• Debt-to-income ratio (DTI) below 43%: Your DTI compares your monthly debt payments to your monthly income.
• Cash reserves: Lenders may require several months' worth of HELOC payments in reserve.

Property-related requirements

• Loan-to-value ratio (LTV) of at least 85%. Most lenders require an LTV of 85% or lower, meaning you need at least 15% equity in your second home.
• Owning the current home for at least one year. This helps establish a pattern of responsible ownership.
• Home appraisal: A professional appraisal determines your second home's current market value, helping lenders calculate the LTV ratio.

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

Why are HELOC rules different for second homes?

Prior to the housing downturn of 2008, homeowners could easily tap into home equity even with very little equity built up. But after 2010, mortgage lenders began to pull back on those loose guidelines. Instead of lending 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 mortgage, home loans for vacation properties are a higher risk for lenders.

1. 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.
2. Vacation homes are considered riskier. If times get tough, homeowners are more likely to forego these 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.

How to get a HELOC on a second home

Getting a second home HELOC is comparable to getting a regular HELOC. Once you’ve determined you're a good candidate for one, follow these steps to apply:

Assess your equity

Before applying, determine the amount of equity in your second home. Your equity is the difference between your home's current market value and your outstanding mortgage balance. Most lenders require a loan-to-value ratio (LTV) of 85% or less for a HELOC on a second home.

Gather necessary documentation

Prepare the following documents:

• Proof of income (pay stubs, tax returns)
• Bank statements
• Information about your current mortgage and other debts
• Proof of homeowners insurance
• Recent property tax statements

Having these documents ready can streamline the application process and demonstrate your financial stability to potential lenders.

Find the right lender

Shop around to find a lender offering competitive interest rates and favorable terms. Consider:

• Traditional banks
• Credit unions
• Online lenders

Compare their offerings, including interest rates, closing costs, and repayment terms. Some lenders may specialize in HELOCs for second homes or investment properties.

Submit a HELOC application

Once you've chosen a lender:

1. Complete the application form, providing personal and financial information.
2. Submit the required documentation.
3. Authorize a credit check. Your credit score will play a significant role in your approval and interest rate.
4. Pay any application fees.

Many lenders offer online applications, making the process more convenient.

Close on your HELOC

After submitting your HELOC application:

1. Home appraisal: The lender will order an appraisal to determine your second home's current market value.
2. Underwriting: The lender reviews your application, credit history, and appraisal report.
3. Approval decision: If approved, you'll receive the terms of the HELOC, including your credit limit and interest rate.
4. Closing: Sign the final documents and pay any closing costs.

The entire process typically takes 2-4 weeks, though this can vary depending on the lender and your specific circumstances.

Remember, a HELOC on a second home often has stricter requirements than one on a primary residence. Maintain a strong credit score, stable income, and significant equity in your property to improve your chances of approval.

Pros and cons of a HELOC on a second home

Pros

A HELOC on a second home can present several advantages, including financial flexibility and possibly some unexpected benefits. 

• Financial flexibility: A HELOC on a second home provides access to funds for emergencies, home improvements, debt consolidation, or purchasing a new home.
• Lower interest rates: HELOCs typically offer lower interest rates compared to credit cards or personal loans.
• Potential tax advantages: The interest paid on a HELOC may be tax-deductible for substantial home improvements, subject to consultation with a tax advisor.

Cons

Despite its potential benefits, a HELOC on a second home does carry certain disadvantages that need to be considered.

• Foreclosure risk: Failure to make payments on a HELOC could result in foreclosure on your first home.
• Variable interest rates: The variable nature of HELOC interest rates may lead to unexpected increases in monthly payments.
• Closing costs: Obtaining a HELOC involves upfront closing costs and fees, similar to your original mortgage.
• Credit impact: Applying for a HELOC results in a hard inquiry into your credit history and may affect your debt-to-income ratio.

Using a HELOC on a second home

A HELOC on your second home can be a versatile financial tool, offering opportunities to improve your property or further your homeownership goals.

Home improvements and renovations

Using your HELOC for home remodeling can increase your second home's value and enhance your enjoyment of the property. Unlike an FHA loan, which is typically used for primary residences, a HELOC on your second home allows you to fund renovations without restrictions on the type of improvements.

Debt consolidation

Consolidating high-interest debts using a HELOC can potentially lower your overall interest payments. However, be cautious about converting unsecured debt into debt secured by your property, as it could put your second home at risk if you struggle with payments.

Financing a down payment on another property

A HELOC can provide funds for a down payment on an additional property, expanding your real estate portfolio. This strategy can be particularly useful when traditional mortgage options, like FHA loans, aren't available for investment properties or additional vacation homes.

Here's how to go about using a HELOC to make a down payment on a second property:

1. Establish your budget: Account for both the HELOC and the mortgage on your second property, plus closing costs (2-6%), property taxes, insurance, and maintenance.
2. Apply for a HELOC: The lender will review your finances, including equity, credit history, income, and LTV. Once approved, you can use the HELOC for your down payment.
3. Search for your ideal second home: Work with a knowledgeable real estate agent to find a property that fits your lifestyle and budget.
4. Finance your second home: Explore various mortgage options as lenders offer different terms and rates that can impact long-term financial planning.
5. Close on your second home: The closing process takes 30-45 days, and you'll be responsible for two mortgage payments along with the HELOC’s monthly payment.

Alternatives to a HELOC on your second home

Despite stricter requirements, you can still access the equity in your second home through various loan options, such as a home equity loan, a line of credit, or a cash-out refinance. The right choice for you will depend on your specific financial situation.

Home equity loans

While discussed earlier, home equity loans offer fixed interest rates and monthly payments, making them suitable for one-time expenses like major renovations. They provide predictability in budgeting and can be advantageous for debt consolidation due to their typically lower interest rates compared to credit cards.

Cash-out refinance loans

A cash-out refinance replaces your current mortgage with a new loan that exceeds you existing mortgage balance, providing the difference as cash. This type of loan can be beneficial if you can secure a lower mortgage rate than your current one, potentially reducing your interest costs while accessing equity.

Cash-out refinances on second homes typically have stricter requirements than those for primary residences, including higher interest rates, increased equity requirements, and higher credit score minimums. Closing costs are usually higher for cash-out refinancing compared to second mortgages.

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 this type of loan often carries higher interest rates. This is why they are often considered a last resort for homeowners.

FAQ: HELOC on a second home

Explore options for a HELOC on a second home

Purchasing a vacation home in sought-after locations like New York or California offers the joy of having a dedicated spot for family vacations. When exploring options for a HELOC on a second home, consider the amount of equity in your current home as a significant factor, since lending standards vary by lender and loan type. 

Always shop around and compare loans that align with your financial goals, and if mainstream lenders fall short, don't overlook the value of smaller, local banks or credit unions.

Discover the best financing options for your dream vacation home by clicking below to compare rates with multiple lenders.