Yes, you can use home equity as a down payment, but it comes with real costs and risks

If you own a home, you can borrow against the value you have built up in it — called home equity — and use that money for a down payment on another property. The most common ways are a home equity loan (a lump sum you borrow and repay on a fixed schedule) or a home equity line of credit, or HELOC (a revolving credit line you draw from as needed). Both let you tap equity without selling your home.

The catch is that you are putting up your current home as collateral. If you cannot repay the loan, the lender can foreclose — meaning you could lose the home you already own while trying to buy another one. This is why lenders offer these loans at lower interest rates than personal loans: the risk is on you, not them.

Key Takeaways

  • Home equity loans and HELOCs let you borrow against your home's value, but your current home becomes collateral if you cannot repay.
  • You will need at least 15 to 20 percent equity in your home to borrow, and the amount you can borrow depends on your home's current value and what you still owe on the mortgage.
  • Interest rates on home equity products are usually lower than personal loans but higher than your primary mortgage rate.
  • Using equity for a down payment means you are taking on two mortgages or a mortgage plus a credit line at the same time, which affects how much a lender will let you borrow for the new property.

How much equity you need to have

Lenders typically want you to keep at least 15 to 20 percent equity in your home after you borrow. That means if your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity. Most lenders will let you borrow up to $70,000 or $80,000 of that, leaving you with at least $20,000 to $30,000 still in the home.

The exact amount varies by lender and by your credit score and income. A mortgage broker or your current lender can run the numbers for your specific situation in one conversation. Do not guess — the difference between what you think you can borrow and what you actually can borrow can derail your down payment plan.

Home equity loans versus HELOCs

A home equity loan works like a second mortgage. You borrow a fixed amount upfront, receive it as a lump sum, and repay it over a set period — usually 5 to 15 years — at a fixed interest rate. Your monthly payment is the same every month. This is straightforward if you know exactly how much you need for the down payment.

A HELOC is more flexible. You get approved for a credit limit, and you draw money from it as you need it, similar to a credit card. You only pay interest on what you actually borrow. Many HELOCs have a draw period (usually 5 to 10 years) when you can borrow and repay, then a repayment period when you can no longer borrow and must pay back what you owe. Interest rates on HELOCs are usually variable, meaning they can go up or down.

For a down payment, a home equity loan is often simpler because you get the money all at once and know your exact monthly cost. A HELOC makes sense if you might need the money in stages or want to keep a safety net of available credit.

What this does to your ability to borrow for the new home

When you explore for a mortgage on the new property, the lender will see that you already have a home equity loan or HELOC. They will count the monthly payment on that debt when they calculate how much you can borrow. This can reduce the size of the mortgage you may have access to for.

For example, if you take out a $50,000 home equity loan with a 10-year repayment period, your monthly payment will be roughly $530. A mortgage lender will assume you have that $530 obligation every month and reduce your borrowing power accordingly. If you were going to may have access to for a $400,000 mortgage, you might now may have access to for $370,000 instead.

This is why it matters to know your numbers before you start the process. Talk to a mortgage lender about how much you can borrow for the new home after you take on the home equity debt, not before. That way you know whether the down payment strategy actually works for the property you want to buy.

Interest rates and closing costs

Home equity loans and HELOCs typically have lower interest rates than personal loans or credit cards, but higher rates than a primary mortgage. The exact rate depends on your credit score, the lender, and current market conditions. Rates on HELOCs are usually variable, so they can rise over time.

Both products come with closing costs — fees for appraisal, title search, legal work, and lender processing. These typically run 2 to 5 percent of the amount you borrow. A $50,000 home equity loan might cost $1,000 to $2,500 in closing costs. Ask the lender for a written estimate before you commit.

The risk of carrying two debts at once

Using home equity for a down payment means you are responsible for two mortgage payments (or one mortgage and one HELOC payment) at the same time. If your income drops or an emergency happens, you have to cover both. If you fall behind on either one, your home is at risk.

This is different from saving for a down payment or borrowing from a family member. You are not just taking on new debt — you are putting your current home on the line to do it. Before you go this route, make sure your income is stable enough to handle both payments comfortably, even if something unexpected happens.

Alternatives to using home equity

If using home equity feels too risky or you do not have enough equity, other options exist. Some first-time homebuyers use a gift letter from a family member to cover part or all of the down payment — the money is a gift, not a loan, so it does not count as debt. Some lenders offer low down payment mortgages that require as little as 3 to 5 percent down, though you will pay mortgage insurance. Some buyers delay the purchase until they can save the down payment themselves.

Each path has trade-offs. A gift avoids new debt but requires family resources. A low down payment mortgage lets you buy sooner but costs more over time. Saving takes longer but builds your financial cushion. The right choice depends on your timeline, your income stability, and how much risk you are comfortable taking on.

Frequently Asked Questions

What if I do not have 15 percent equity in my home yet?

You cannot borrow against equity you do not have. Some lenders will go lower than 15 percent, but the rates will be higher and you may need a stronger credit score. Contact your current lender or a mortgage broker to find out what is possible in your situation.

Can I use a HELOC if I have not closed on the new home yet?

Yes, but the timing matters. You need the down payment money in hand before closing on the new property. Most lenders will let you draw from a HELOC before closing, but confirm this with your lender and have the funds transferred to your account well before your closing date.

What happens to my home equity loan if I sell my current home?

You will have to pay off the home equity loan from the sale proceeds before you receive any money. If you sell for $400,000 and owe $200,000 on the mortgage and $50,000 on the home equity loan, you walk away with $150,000. Plan for this when you think about your timeline.

Will using home equity hurt my credit score?

Opening a new credit account will cause a small, temporary dip in your score. Over time, making on-time payments on the home equity loan will help your score. The bigger impact comes from the new debt itself — lenders will see you as carrying more total debt, which affects how much they will lend you.

Can I use home equity if I am still paying off my mortgage?

Yes. You can borrow against equity even while you are paying down your primary mortgage. The lender will make sure you have enough equity left in the home after the loan, and they will factor both payments into your debt-to-income ratio when you explore for the new mortgage.