What home equity is and how lenders let you borrow against it

Home equity is the difference between what your house is worth and what you still owe on the mortgage. If your house is worth $400,000 and you owe $250,000, you have $150,000 in equity. Lenders will let you borrow against that equity—meaning you can turn it into cash—through a few different structures. The most common are a home equity loan (a lump sum you borrow all at once) and a home equity line of credit, or HELOC (a revolving credit line you draw from as needed). Both use your house as collateral, which is why the interest rates are usually lower than credit cards or personal loans.

The reason this matters for a down payment is timing and cost. You can borrow the money quickly—often within two to four weeks—and the interest rate is typically lower than other borrowing options. But there is a real risk: if you cannot repay the loan, the lender can foreclose on your house. This is not theoretical. It happens when someone borrows against home equity for a down payment, the real estate market drops, and they end up owing more than the house is worth.

Key Takeaways

  • Home equity loans and HELOCs let you borrow money using your current house as collateral, with interest rates usually lower than credit cards or personal loans.
  • Lenders typically allow you to borrow 80 to 90 percent of your home's equity, though the exact amount depends on your credit score, income, and the lender's rules.
  • A home equity loan gives you a lump sum with a fixed interest rate and fixed monthly payment; a HELOC works like a credit card and lets you draw money as you need it.
  • Using home equity for a down payment means you are borrowing against your primary residence to buy a second property, which increases your total debt and your monthly obligations.
  • If the housing market declines or you lose income, you could end up owing more than both houses are worth, which is why this strategy carries real financial risk.

How much of your equity you can actually borrow

Lenders do not let you borrow all of your equity. Most will lend you up to 80 or 85 percent of your home's equity, though some go as high as 90 percent. The exact amount depends on your credit score, your income relative to your total debt, and the individual lender's rules. A lender will order an appraisal of your house to confirm its current value, then calculate how much you can borrow based on that number.

The math works like this: if your house appraises at $400,000 and you owe $250,000, your equity is $150,000. At 80 percent, you can borrow $120,000. At 85 percent, you can borrow $127,500. The difference matters if you need a specific down payment amount. You will also need to account for closing costs on the home equity loan itself—typically 2 to 5 percent of the loan amount—which reduces the cash you actually receive.

Your credit score affects both the amount you can borrow and the interest rate you will pay. Lenders typically require a score of at least 620, though rates are better at 700 and above. If your score is lower or your debt-to-income ratio is high, a lender may offer you less money or decline the loan entirely.

Home equity loan versus HELOC: which structure fits your situation

A home equity loan is straightforward: you borrow a fixed amount, receive it as a lump sum, and repay it over a set term (usually 5 to 20 years) with a fixed interest rate and fixed monthly payment. You know exactly what you owe and what your payment will be every month. This works well if you know the exact down payment amount you need and want predictability.

A HELOC works more like a credit card. The lender approves you for a maximum credit line—say, $150,000—and you draw from it as you need the money. During the draw period (usually 5 to 10 years), you pay interest only on what you have borrowed, not on the full approved amount. After the draw period ends, you enter a repayment period where you can no longer borrow and must repay the balance, usually over 10 to 20 years. Interest rates on HELOCs are typically variable, meaning they move with the market.

For a down payment, a home equity loan is often simpler because you get the money in one payment and you know your monthly cost when ready. A HELOC makes sense if you are not sure exactly how much you need, or if you plan to use the credit line for other purposes beyond the down payment. The variable rate on a HELOC is a risk if interest rates rise sharply during your draw period.

The process process and what lenders will ask for

The process is similar to getting a mortgage. You will need to provide proof of income (recent pay stubs, tax returns), bank statements, and documentation of your current debts. The lender will pull your credit report and order an appraisal of your house. The appraisal usually takes one to two weeks. Once the lender has all the information, underwriting typically takes another one to two weeks, and closing another week or so. Total time is usually three to five weeks, though it can be faster with some lenders.

You will also need to disclose what you plan to use the money for. Lenders are required to ask, and some have restrictions on what they will fund. Most will lend for a down payment on an investment property or a second home without issue. Some lenders have stricter rules about cash-out refinances or other uses, so it is worth asking upfront.

At closing, you will sign documents that put a lien on your house—a legal claim that gives the lender the right to foreclose if you do not repay. You will also pay closing costs, which typically range from 2 to 5 percent of the loan amount. These costs cover the appraisal, title search, underwriting, and legal fees.

How borrowing against your home changes your financial picture

Using home equity for a down payment means you now have two debts secured by one house. If you borrow $100,000 against a house worth $400,000 to buy a second property, you have a first mortgage on the first house, a second mortgage (the home equity loan) on the first house, and a new mortgage on the second house. Your total debt has increased, and so have your monthly obligations.

Lenders care about this. When you explore for the mortgage on the second property, the lender will see the home equity loan on your credit report and factor it into your debt-to-income ratio. This may reduce how much they will lend you for the second property, or it may disqualify you entirely if your total debt is too high. It is worth running the numbers before you commit to borrowing against your home.

There is also a timing issue. Most lenders will not close a home equity loan and a new mortgage on the same day. You typically need to close the home equity loan first, then use that money for the down payment on the second property. This means you will have two closing dates and two sets of closing costs.

The risk: what happens if property values drop or you lose income

Home equity borrowing is secured debt, which means the lender can take the house if you do not repay. This is the core risk. If you borrow $100,000 against your primary residence to buy a second property, and the real estate market declines 20 percent, both houses are now worth less. You might owe more than both properties are worth combined. This situation is called being underwater, and it is difficult to recover from.

The risk is higher if you borrow a large percentage of your equity. If you borrow 85 percent and the market drops 15 percent, you have no cushion. If you lose your job or face a major expense, you may not be able to make payments on both mortgages and the home equity loan. Foreclosure on your primary residence is a real outcome.

This is why financial advisors often recommend keeping at least 20 percent of your home's equity untouched. If you have $150,000 in equity, borrowing $100,000 (67 percent) is less risky than borrowing $127,500 (85 percent). The lower amount gives you room if circumstances change.

Alternatives to home equity borrowing for a down payment

If home equity borrowing feels too risky, or if you do not have enough equity, there are other ways to fund a down payment. Saving from income is the safest option, though it takes time. Some employers offer down payment information programs. Some states and cities have down payment information programs for first-time buyers, though these usually explore only to primary residences, not investment properties or second homes.

You can also ask family members for a gift. Many lenders allow down payment gifts as long as the giver signs a letter stating it is a gift, not a loan. This avoids the debt and the collateral risk of home equity borrowing. The tradeoff is that it requires family resources and willingness.

Another option is to buy the second property with a smaller down payment and accept a higher interest rate or mortgage insurance. This spreads the cost over time rather than concentrating it in a lump sum you have to borrow now. The math depends on your specific situation, but it is worth comparing to the cost of a home equity loan.

Frequently Asked Questions

Can I use a HELOC for a down payment if I have not closed on the second property yet?

Yes. A HELOC is approved before you use it, so you can open the line of credit, then draw from it when you are ready to make an offer or close on the second property. This gives you flexibility if you are still shopping. Just be aware that the lender may require you to draw the full amount within a certain timeframe, or the line may expire.

What happens to my home equity loan if I sell the first house?

You must repay the home equity loan in full from the sale proceeds before you receive any money. If you sell a house worth $400,000 and you owe $250,000 on the first mortgage and $100,000 on the home equity loan, you owe $350,000 total. You receive $50,000 after closing costs. If you cannot repay the home equity loan from the sale, the lender can block the sale or place a lien on the proceeds.

Will taking out a home equity loan hurt my credit score?

Yes, but usually not by much. The lender will do a hard inquiry, which typically lowers your score by a few points. Opening a new account also affects your score. Over time, making on-time payments on the home equity loan will help your score recover and may even improve it by showing you can manage multiple types of credit.

Can I borrow against a house I am still paying off?

Yes. You do not need to own the house outright. As long as you have equity—meaning the house is worth more than you owe—you can borrow against it. The home equity loan becomes a second lien, behind the first mortgage. The first mortgage lender has priority if something goes wrong.

What if the appraisal comes in lower than I expected?

The amount you can borrow is based on the appraised value, not what you think the house is worth. If the appraisal is lower than expected, the lender will reduce the maximum you can borrow. You can request a reappraisal if you believe the first appraisal is wrong, but you will pay for it. Some lenders will not approve a second appraisal, so check their policy before you ask.