Getting a HELOC on a second home can be done, but consider your options
The average homeowner hit a record $300,000 in home equity in mid-2022, according to CoreLogic. 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.Check your home equity loan options. Start here
In this article (Skip to...)
- Accessing your equity
- How to get a HELOC
- Home equity loan vs HELOC
- HELOC alternatives
- Eligibility rules
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).Check your home equity loan options. Start here
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 downturn.
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.
How to get a HELOC on a second home
Due to the elevated risk that second homes pose for lenders, second-home financing typically comes with higher interest rates and stricter financing rules.Check your HELOC or home equity loan options. Start here
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’s 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 for 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.
Benefits of a HELOC on a Second Home
A HELOC on a second home can present several advantages, providing you with financial flexibility and possibly some unexpected benefits. There are numerous examples of homeowners using a HELOC on a second home successfully. Whether it’s for home improvements that increase the property value, funding a new business venture, or managing unexpected medical expenses, a HELOC can provide the necessary capital.
You may have access to a sizable sum of money through a home equity line of credit, which you can use as you need it. This may be helpful in an emergency situation or with large expenses like debt consolidation, home renovations, or educational costs.
Lower Interest Rates
Because your home is secured by the loan, a HELOC frequently has interest rates that are significantly lower than those of credit cards or personal loans. Over the course of the loan, this may save a lot of money.
Potential Tax Advantages
The interest paid on a HELOC may, under certain conditions, be tax deductible. This holds true if substantial home improvements are made with the money. To determine if you are eligible for these benefits, it is essential to speak with a tax advisor.
Risks and Drawbacks of a HELOC on a Second Home
Despite its potential benefits, a HELOC on a second home does carry certain risks and drawbacks that need to be considered.
One of the biggest risks associated with a HELOC is the potential for foreclosure. Your second home is used as collateral for the loan, so if you are unable to make your HELOC payments, the lender has the right to foreclose on it.
Fluctuating Interest Rates
The majority of HELOCs have variable interest rates, which means that they may rise over time. This can cause your payments to go up and your financial burden to grow in ways you didn’t expect.
Closing Costs and Other Fees
Just like your original mortgage, obtaining a HELOC involves closing costs and other fees, which can add up. These costs can include application fees, appraisal fees, and annual fees, among others.
Impact on Credit Score
When you apply for a HELOC, lenders will perform a hard inquiry on your credit report, which can lower your credit score slightly. Also, having a lot of debt from a HELOC can affect your debt-to-income ratio and make it harder to get other types of credit.
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.Verify your home equity loan options. Start here
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 entail taking out a revolving line of credit with your home’s equity as security, which you can borrow from and repay as often as you like within a predetermined 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 of 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 Apply for 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 a HELOC, follow these steps to apply:
- Choose a lender: Do research on different lenders, looking at their interest rates, fees, customer service, and HELOC terms.
- Begin the application process: Once you’ve decided on a lender, you’ll need to complete their application process, which usually entails filling out a form outlining your financial situation.
- Gather paperwork: You will almost certainly be required to provide documentation such as tax returns, pay stubs, a list of your debts and assets, and information about your second home.
- Wait for approval and a home appraisal: After you submit your application, the lender will assess your eligibility and schedule an appraisal to determine the value of your second home. This appraisal will determine the amount of credit that is available through your HELOC.
When choosing a lender for a HELOC on a second home, you should think about their reputation, competitive interest rates and terms, loan amount and equity requirements, fees and costs, and the quality of their customer service.
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.
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.Check your cash-out refinance eligibility. Start here
Just note that the rules for a cash-out refinance on a second home will be more stringent than those for cashing out a primary residence. Expect 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 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.Time to make a move? Let us find the right mortgage for you
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.
Frequently asked questions about HELOC on a second home
Both a HELOC and a home equity loan are based on the value of your home. However, a HELOC gives you a credit line that you can use as needed, while a home equity loan gives you a lump sum of money.
Yes, you can get a HELOC on a second home even if you already have a mortgage on it, as long as the home has enough equity.
HELOCs typically have a “draw period” of 5–10 years during which you can draw money and pay interest only. After this time, you’ll have to repay the principal and interest during the “repayment period,” which typically lasts between 10 and 20 years.
Interest on a HELOC is tax-deductible only if the money is used to buy, build, or make major changes to the home that is used as collateral for the loan.
Yes, a lender has the right to reduce or freeze your HELOC under specific circumstances. Common reasons include a significant decrease in the value of your home or changes in your financial circumstances.
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.