CBS News
Can you get a HELOC on a second home?
Getty Images
When mortgage rates dropped to 3% or lower during the pandemic, buyers flocked to the market to secure cheap rates on homes. And, while the majority of these buyers were purchasing a primary home, some buyers opted to capitalize on the inexpensive borrowing landscape by purchasing a second home, whether the goal was to start a short-term rental business or purchase a vacation home for getaways.
But with mortgage rates now hovering near 7% and home values still elevated, much of the focus has shifted from inexpensive mortgage loans to home equity lending. After all, the average homeowner has nearly $200,000 in home equity they can tap into right now, and it can typically be done at a rate that’s much lower than they’d get with a credit card or personal loan. So, it’s a smart time to take advantage of what home equity loans and home equity lines of credit (HELOCs) can offer you.
If you own a second home in addition to your primary residence, you may be wondering if you can tap into the equity by taking out a HELOC, which is a revolving line of credit that is secured by the equity you’ve built up in your home. The short answer is yes, in many cases, you can get a HELOC on a second home in addition to your main home. However, there are some important considerations to keep in mind.
Find today’s top HELOC rates online now.
Can you get a HELOC on a second home?
It is possible in many cases to get a HELOC on your second home. Most major lenders, including banks, credit unions and online lenders, offer HELOCs on vacation homes and investment properties. However, some smaller local banks and credit unions may only extend HELOCs on primary residences.
When you apply for a HELOC on a second home, the application and qualification processes are relatively similar to the process of applying for a HELOC on your main property. The main difference is when you apply for a HELOC on a second home, the lender will typically consider both your primary residence and second home.
And, there may be a few other minor differences worth noting, too. For example, you may find that lenders have different loan-to-value (LTV) requirements for primary versus non-primary residences. HELOCs on second homes also tend to have slightly higher interest rates compared to primary residences.
Those minor differences are due to loans on vacation homes and investment properties being seen as higher risk. After all, you don’t live there full-time and may be more likely to walk away if having financial difficulties, so allowing you to tap into the equity on the property can be a little riskier than it would be on your primary home.
Learn more about the home equity rates you could qualify for here.
Qualifying for a HELOC on a second home
The approval process for a HELOC on a second home differs from one lender to the next. That said, in order to qualify for a HELOC on a second home, you can expect most lenders to closely evaluate your:
- Credit score and credit history
- Income and employment
- Total existing debt levels
- Home equity in both properties
You’ll also generally need to meet minimum equity requirements on the second home, just like you would when applying for a HELOC on your main residence. These minimum equity requirements can range from 15% to 35% depending on the lender and the home’s occupancy status (vacation vs. rental property). Lenders may also want to see that the second home is in good condition.
But having high levels of equity alone won’t be enough to get approved for a HELOC if your income isn’t sufficient to cover the additional payment. In addition to having enough equity, your total debt levels, including mortgage payments, HELOC payments and other loans, typically cannot exceed around 40% to 45% of your gross monthly income.
Reasons to get a HELOC on your second home
In general, you can borrow money from your home equity for nearly any purpose — and the same is true for a HELOC on a second home. However, there are a variety of potential reasons why homeowners may be interested in a HELOC on a second home in particular, including:
Because a HELOC is a revolving line of credit, it can provide easy access to cash over an extended period, so it can be a smart way to borrow money for these or other purposes. However, it’s important to only borrow what you truly need, as failing to make payments can put your second home at risk.
The bottom line
A HELOC can be an effective way to tap into the equity of a second home when you need to. However, it’s important to understand that there’s increased risk to lenders when you borrow money from a second home, so they will typically have strict qualification criteria that can make it more difficult than normal to be approved. As you pursue this option, keep that in mind, and be sure to shop around, compare rates and terms and ensure you have steady income to manage any new payment obligations.
Watch CBS News
Be the first to know
Get browser notifications for breaking news, live events, and exclusive reporting.
Getty Images/iStockphoto
Record-high inflation in the post-pandemic era has been challenging for many Americans, but retirees often face added struggles as prices rise since many are on a fixed income. That’s why it comes as no surprise that 59% of retirees expressed concerns about their financial security, according to a survey conducted by MedicareFAQ.
The good news is that many seniors have a significant source of funds to draw from in their home equity. In fact, for seniors 65 and over, the median value of their home equity is $250,000. That’s a 47% increase in the value of equity since before the pandemic.
Older Americans who need extra funds can tap this equity to help make ends meet, and they have different ways to do it including a home equity loan and a reverse mortgage. There are important differences between home equity loans vs. reverse mortgages, though, so retirees must do more than just compare today’s home equity interest rates to decide which is best.
This guide will help you understand when a reverse mortgage makes sense and when you should opt for a home equity loan instead.
Find out more about your home equity loan options here.
When a reverse mortgage is better for seniors
Reverse mortgages use your home as collateral, just as traditional mortgage loans do — but they work very differently. That’s because you don’t send in monthly payments with a reverse mortgage. Instead, your lender sends money to you and your loan balance grows each month. When you pass away or move, the reverse mortgage must be paid back.
“A reverse mortgage is intended for borrowers over age 62 that are not able to afford their monthly payments using their current retirement income and need additional income to help with their responsibilities,” says Lisa Gaffikin, a home loan specialist at Churchill Mortgage.
Gaffikin says that if you have limited income, you may not qualify for a traditional home equity loan but a reverse mortgage could be an option. You’ll get to stay in your home without adding to your monthly obligations, while also being able to supplement your current income.
You do need to have sufficient equity in your home though, and will need to follow requirements including continuing to maintain the property over time.
“Reverse mortgages are ideal for seniors who are house-rich but cash-poor,” says Josh Lewis, a certified mortgage consultant and host of The Educated Homebuyer.
Lewis also addressed a common concern seniors have about reverse mortgages: the ability to leave property to loved ones when you pass away, which could be impacted by the fact the loan must be paid upon your death.
“There’s a misconception that you won’t have a home to leave to your heirs but that is not true,” Lewis says. “You’ll have a home, but the equity your heirs inherit will depend on how long you live and how your home appreciates over time. It’s truly no different than inheriting a home with a traditional mortgage, except the loan balance will need to be paid off through a refinance or sale within six to 12 months of the homeowner’s passing.”
Learn about how a home equity loan could benefit you today.
When a home equity loan is better for seniors
Home equity loans work differently than reverse mortgages. You’ll still need equity and must use your home as collateral, but you receive the borrowed funds upfront when you take out the loan and you must start making payments on the debt immediately.
“Home equity loans are ideal when you need a lump sum and can handle monthly payments,” Lewis says. “With lower upfront costs and typically lower interest rates, they’re perfect if you want to keep building equity and might sell or pass on your home soon. This option works well for those with a steady income who are looking to borrow for a specific purpose.”
The key thing to remember, though, is that you must qualify by showing the lender you have enough money to afford the loan payments and you must be able to make those payments for the duration of the loan term. This isn’t always easy when you need extra cash.
“A home equity loan might be a better option if the homeowner is not struggling to make current payments and only needs equity from the home to consolidate non-property debts or to lower monthly expenses for liabilities with higher interest rates,” Gaffikin says. “If the borrower is comfortable with their housing expenses and can make the current housing-related payments and the new home equity loan payment, a home equity loan might very well be the best choice.”
Gaffikin recommends looking at your full financial picture and considering the long-term implications of your decision when deciding which is right for you.
The bottom line
Ultimately, if you want to access equity with no monthly payments and are OK with leaving less equity to your heirs, a reverse mortgage is likely the better option and you should shop carefully to find the best reverse mortgage companies to minimize interest and fees. If you’d rather pay back your loan during your lifetime and can afford it, a HELOC is the better choice.
Watch CBS News
Be the first to know
Get browser notifications for breaking news, live events, and exclusive reporting.