How to use a HELOC to purchase a second home
If you're in the market for a second home, you may be considering ways to finance the purchase. Between a down payment and closing costs, you'll typically need between $8,620 and $107,750 available to purchase the average home in the United States. And, the low end of that range assumes that you can purchase the home with 0% down, which is rare.
But you could still have options, even if you don't have enough cash on hand to purchase your second home. For example, the home equity from your primary residence may help bridge the gap between the money you have and the money you need to buy a second home. That's especially true in today's economic environment — one in which the average homeowner has about $299,000 in equity.
And, one way to tap into your home's equity to get the funds for a second home purchase is to use a home equity line of credit (HELOC). But how exactly do you do that?
Find out how much funding you have available via a HELOC now.
How to use a HELOC to purchase a second home
Here's how you can use your home's equity to purchase a second home.
Step #1: Figure out how much financing you need
Start by determining how much money you'll need to purchase your second home. Set a budget for the maximum price you're willing to pay. Then, think about how much money you will need to make your purchase, inclusive of a 20% down payment and 6% closing costs.
For example, let's say your budget for your second home is $400,000. In this case, you should budget $80,000 for your down payment and $24,000 to cover potential closing costs for a total of $104,000.
Use a HELOC to purchase your second home today.
Step #2: Apply for a HELOC
Next, apply for a HELOC to cover your down payment and closing costs. This process includes finding a lender, gathering all required documentation and waiting on an approval decision.
During the application process, you'll also find out how much you can borrow with a HELOC. Each lender has a cap on the percentage of your equity you can borrow, but that amount is generally between 80% to 90% of the equity in your home.
Step #3: Shop for a second home
Get in touch with a real estate agent and ask about homes matching what you're looking for in the market or consider doing an online search. Take the time to explore your options and choose a second home that meets your needs. When you do, make an offer.
Step #4: Apply for a mortgage on your second home
Once the seller has accepted your offer, it's time to secure financing. Compare mortgage lenders to find competitive rates and terms and apply for the mortgage that works best for your needs.
Step #5: Draw equity from your HELOC
As soon as your offer is accepted and you have a good idea of how much money you'll need for the down payment and closing costs on your second mortgage, it's time to draw from your HELOC. When you receive the funding, consider putting it in a high-yield savings account to earn a meaningful return on the money until your closing date.
Step #6: Close on your second home
Finally, it's time to close on your second home. The closing process on a second home is similar to closing on your primary residence; you'll sign the paperwork and enjoy your new home.
Find out how affordable your second home purchase could be with a HELOC today.
The bottom line
If you're in the market for a second home, a HELOC on your primary residence may be the key. While the process may seem cumbersome if you've never accessed your home equity using a HELOC, it's relatively straightforward once you get started.
