Leveraging a HELOC to Buy a Second Home

If Fannie Mae has made on thing clear in the past couple years, it’s that they don’t want you using their loans to buy a second home.

Conventional vacation home mortgage rates went through the roof in early 2022. Fannie Mae and Freddie Mac added upwards of 4 points in fees to mortgages for second homes.

That has led to buyers wondering if they can use a home equity line of credit (HELOC) to purchase a vacation home. The answer is yes.

HELOCs have no restrictions on use. You could use the money to buy a boat, pay off debt, go on vacation, and buy a vacation or rental property.

Plus, tapping your current home’s equity with a HELOC involves a lot less time, work, and closing costs compared to a standard second home mortgage.

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HELOC for vacation property process

You’ll get funds from a HELOC quickly compared to a primary mortgage. Here’s how the process works.

1. Find a lender: Some local banks and credit unions let you tap up to 100% of your home’s equity with a HELOC. Get help finding a HELOC lender here.
2. Estimate amount needed: Know how much you’ll need to close the vacation property purchase. Factor in extra costs like title and escrow.
3. Check your home equity: If you need $200,000, make sure your home value is at least that much more than your current loan balance.
4. Apply: Make formal application with a HELOC lender and submit any requested documentation.
5. Wait: The lender could take a week or two to review the loan. Sometimes an appraisal is not required, which speeds your approval.
6. Sign final paperwork: Once approved, the lender will issue final loan documents.
7. Get funds: After 3-4 days, you will have access to funds. Draw out only the amount you need when you need it. You only pay interest on withdrawn funds.
8. Make an offer on the vacation home: To the seller, your offer is essentially cash, making it highly attractive.
9. Close on the vacation home: You can close very quickly, thanks to easy access to HELOC funds.

Should you use a HELOC to purchase a second home?

Many people say HELOC rates are too high and to use a traditional Fannie Mae mortgage.

But when you add Fannie Mae and Freddie Mac’s new fees, you won’t save much.

According to Mortgage News Daily, 30-year conventional mortgage rates are 7.39% at the time of this writing. But this is for a primary residence. Second home rates will be at least 1% higher, putting you solidly in the mid 8s.

A HELOC rate? It could be as low as 8% at the time of this writing. HELOCs are based on the prime rate, currently 8.5%. Many HELOC lenders offer rates at prime minus 0.5%, prime, or prime plus 0.5%. So you’ll likely be in a similar range with a HELOC as with a standard loan.

HELOC rates fluctuate with the prime rate, so be careful. Still, the Federal Reserve is likely near the end of its rate-hiking cycle, so your rate could stay the same or drop in the next year or two.

Many HELOC lenders offer the option to lock in a portion or all of the HELOC balance at a slightly higher rate. This is a great tool for those worried about the possibility of rising rates.

One drawback, though, is that you are borrowing against your primary home to buy the vacation property. If you can’t make the HELOC payment, the home you live in is at risk.

All in all, though, a HELOC is a fast, easy, and alternative way to get funds a vacation residence.

HELOC payments are more affordable

You have the option on most HELOCs to pay interest only. If you use $200,000 at an 8% rate, your payment would be $1,333 per month.

$200,000 X 0.08 / 12 = $1,333

This is much lower than you’d pay for a standard mortgage, but keep in mind that this amount does not include any principal, taxes, insurance, or HOA dues.

You can choose to make principal payments when you’d like, but it’s not required.

Those who want a vacation property at the lowest possible monthly cost should consider a HELOC.

Related reading

• How Long Does It Take To Get A HELOC?
• List of 100% LTV HELOC Lenders
• Investment Property HELOC Lenders
• How To Know Whether To Get A HELOC or Cash Out Refinance
• How To Get Low HELOC Closing Costs

Apply for a HELOC to buy a vacation property

If a HELOC sounds like the right solution, apply with a HELOC lender. We’ll match you to the right lender for your situation.