Last updated: January 28, 2025

Using Your Equity

Can you use a HELOC for a down payment?

Couple that used a HELOC for a down payment on a new home are happy to be moving in.

Please note: Discover® Home Loans offers a home equity loan product but does not offer HELOCs.  

A home equity line of credit (HELOC) may help if you want to finance a renovation or repair in your home.

You also may be able to use a HELOC for a down payment on a second property, which may turn out to be a wise financial decision. 

What to know about using a HELOC as a down payment

  • Aside from financing repairs or renovations, a HELOC may be used for a down payment on a new home or investment property.
  • While not for everyone, some people benefit from this approach.
  • In some cases, the costs of using a HELOC for a down payment may outweigh the benefits.

People often use second mortgages like a HELOC or a home equity loan to quickly access cash. Both mortgage products use your home as collateral and require you to have a minimum amount of equity in your home. 

When determining whether using a HELOC for a down payment is right for you, keep in mind that defaulting on the loan could lead to a foreclosure on your home.

How do HELOCs work?

HELOCs are secured revolving lines of credit, meaning you can borrow cash as you need it. If approved, you can access funds up to a fixed credit limit based on your home equity amount and other factors. 

You can usually borrow from a HELOC as often as you need during the draw period, which is typically 10 years. During the draw period, you normally only have to make interest payments on the amount you borrow.

Because you can repeatedly borrow from a HELOC, this loan option may offer flexibility. For example, some borrowers use a HELOC for long-term home renovations that might include unanticipated expenses. 

Like with a first mortgage, your lender will place a lien on your home until you pay off your HELOC. With your home serving as collateral, your lender can start the foreclosure process if you fail to make payments.

READ MORE: HELOC: Home equity line of credit handbook

Using a HELOC for a down payment

Using a HELOC to cover a down payment makes more sense in some situations than others. 

Say you plan to purchase an investment property and then rent it out to tenants. A HELOC can provide you with the funds for a down payment on the property. 

You may also use a HELOC if you plan to purchase a new home to live in. If you need to move into the home before your current one sells, a HELOC can cover a down payment on the new home. 

Pros and cons of using a HELOC for a down payment

A HELOC can give you quick access to cash for a down payment. However, borrowing money against your home's equity may come with some risks. 

Before applying, determine whether a HELOC is right for you.

Pros of using a HELOC for a down payment

There are many advantages to using a HELOC for a down payment. 

A HELOC can be a lower risk to lenders than other types of credit because your home serves as collateral to secure the loan. As a result, lenders generally offer a lower annual percentage rate (APR) for HELOCs than other types of credit.

Also, a HELOC may suit you better than another kind of loan. With HELOCs, you only pay back the money you use (plus interest), and aren’t required to borrow the full amount available.

Typically, interest payments begin as soon as you use your HELOC, and you don't start paying the loan principal until after your draw period concludes.

Because you can borrow from a HELOC as needed, you can use it not only for a down payment but for repairs, renovations in your new property, as well as move-in fees. Even using a HELOC to pay off a mortgage is possible.

If you approach a HELOC with the same care as any line of credit by taking out only what you need and can repay, using this option for a down payment may be a smooth process.

Cons of using a HELOC for a down payment

While HELOCs can be a helpful tool for down payments and other expenses, you should understand their drawbacks. 

As you begin paying off a HELOC, you may find that your bill fluctuates over time. HELOCs usually have variable interest rates and payments, which may make it harder for you to budget. 

Some lenders offer discounted HELOC introductory rates that go up over time, so consider how your rates could change. Depending on the product, you may need to pay a lump sum for what you owe at the end of your draw period, known as a balloon payment.

Like mortgages, most HELOCs have closing costs that can add up, such as underwriting, appraisal, and application fees. Depending on your lender, you may have to pay fees for withdrawing funds or closing a HELOC early. 

A HELOC may also reduce the equity you have in your home.

If you fail to make payments on a HELOC, your lender can start the foreclosure process. Ensuring your finances are stable may help mitigate this risk. Consider talking to a financial advisor or mortgage consultant before taking on a HELOC or any other loan.

Closing thoughts: Using a HELOC for a down payment

There are times when using a HELOC for a down payment may make financial sense. Funds from a HELOC can help you cover the upfront cost of purchasing a new home or, an investment property.

Using a HELOC for a down payment may come with risks, though. HELOC payments are often variable, which could make it more difficult to budget. If you can’t make payments on your HELOC, you may lose your home.

Knowing the risks of a HELOC is important and so is making sure the product is right for you. Before committing to a HELOC or another loan, shop rates and terms with different lenders.

Main

The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank or its affiliates.

Tap into your equity today

Get the funds you need for home improvements, debt consolidation, or life's next big adventure.
Main

Start your application online or give us a call.

  • Weekdays 8am–Midnight ET
  • Weekends 10am–6pm ET

Loan Payment Example Disclosure

For example, if you borrowed $60,000 for a 20 year term at 8.86% APR, your fixed monthly payments would be $534.45.