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We’ve had a few clients call to ask if they could use the equity in their home to buy a rental property. They’ve seen property values go up for years, and with a lot of people looking to rent, many think it’s a good time to take the jump. The short answer is yes, but there are nuances. And hence, here I am, writing this article.
It sounds easy to use the equity in your home to buy another one, but when you look at the numbers, it's not so simple. You're turning money you've already made into a new debt, which changes your whole financial situation. I've seen this work great for some homeowners, but I've also seen others have trouble when they didn't think about all the moving parts.
This guide tells you everything you need to know about using your home equity to buy another house in 2025, including how the process works, the real costs, benefits, risks, and other options you should think about.
Home equity is the part of your house that you own free and clear. When you pay your mortgage each month, part of that payment goes toward lowering the amount you owe on the loan. You build equity from both sides when the value of your home goes up.
The math is easy:
Home equity is the difference between the current value of your home and the amount you still owe on your mortgage.
You bought your home five years ago for $300,000, putting down $60,000, or 20% of the total. You borrowed $240,000 at first. Your home is worth $400,000 now, and you’ve made your payments, so your mortgage balance is $210,000. Your equity is $190,000, which is $400,000 minus $210,000.
Cotality's Q2 2025 Homeowner Equity Report says that U.S. homeowners with mortgages have a total of $17.5 trillion in home equity. The average mortgaged homeowner has about $307,000 in equity (Cotality, September 2025). That's the third-highest quarterly average in their dataset, even though homeowners lost an average of $9,200 in equity each year because prices weren't going up as quickly.
That loss of equity sounds worse than it is. During the pandemic boom years, when homeowners made $25,000 to $55,000 a year, home prices went up. Now, though, they are going down. Now we're seeing smaller gains, and in some places, like Florida and Washington, D.C., prices are actually going down. But even in those markets that are going down, the average homeowner still has a lot of equity: $290,000 in Florida and $350,000 in D.C., the same report says.
You can borrow against the equity in your home with a home equity loan, which is also called a second mortgage. You get the money all at once and pay it back in fixed monthly payments over a set period of time, usually between 10 and 30 years. Your home is used as collateral for the loan, which is why lenders can charge lower interest rates than they would for unsecured loans.
Bankrate's survey of the biggest lenders in the country shows that the average home equity loan rate is 8.11% as of October 22, 2025. This is for a $30,000 loan with a credit score of 700 and a combined loan-to-value ratio of 80%. Your credit score, how much equity you're borrowing, and whether you're already a customer or sign up for auto-payments all affect your actual rate.
Most lenders will let you borrow 80% to 85% of your home's value, minus what you owe. If your home is worth $400,000 and you owe $210,000, a lender might let you borrow up to 80% of $400,000 ($320,000) minus your current loan ($210,000), which equals $110,000 in available equity.
When clients ask us about using home equity to buy a second property, we always start with the pros because there are good reasons to think about this option.
This is probably the best thing about it. If you want to buy a $250,000 investment property and can only put down 10% ($25,000), you'll need a $225,000 loan. You can lower your investment property mortgage to $200,000 by taking out a $50,000 home equity loan and putting down 20% ($50,000).
Why that matters more than just having a smaller loan: putting down 20% usually gets you better mortgage rates and gets rid of private mortgage insurance (PMI), which can cost $100 to $200 or more a month.
Please let me go over the real numbers. If you took out a $225,000 loan with a 7.5% interest rate, your monthly payment would be about $1,573. If you put down 20%, you might be able to get a better rate on a $200,000 loan at 7.25%. Your payment would drop to about $1,364. That's about $200 less each month, or $2,400 less each year.
It is harder to get a loan for an investment property or a second home than for a primary residence. Most lenders want borrowers to have higher credit scores (usually 680 or higher for investment properties and 620 or higher for primary homes), bigger down payments (20–25% instead of 10–15%), lower debt-to-income ratios, and proof of cash reserves (usually six or more months' worth of mortgage payments).
When you use a home equity loan for the down payment, you're basically pre-qualifying yourself by showing that you can handle the extra debt and bring a lot of money to the closing.
At AmeriSave, we've found that this method works especially well for borrowers who have a lot of equity but not a lot of cash on hand. Your home equity becomes the down payment, and you're using an asset you've already built instead of taking money out of your emergency fund or investment accounts.
In 2025, this benefit will be even more clear. Home equity loans are currently averaging 8.11% across the country (Bankrate, October 2025). Credit card rates are around 23%, and personal loans are at 12% or more. If you need $50,000 for a down payment, the difference in interest rates is huge.
Sorry, let me be clearer about those numbers because this is very important.
Choosing home equity over a personal loan will save you almost $20,000 in interest over the life of the loan.
I don't know much about taxes, but this is worth saying. The Tax Cuts and Jobs Act of 2017 says that you may still be able to deduct the interest on a home equity loan if you use the money to "buy, build, or substantially improve" the property that secures the loan, or possibly another property in some cases (IRS Topic 505).
The rules get tricky, especially if you use equity from your main home to buy an investment property. You should definitely talk to a tax professional before assuming you'll get this benefit. But if you can deduct the interest, that lowers the cost of borrowing even more.
Now let's talk about what makes me worry when clients go this way. I've seen people get into trouble because they didn't think these things through carefully.
This is the main source of stress. If you take out a home equity loan, you're turning equity that you've worked hard to build up over years or even decades back into a debt. In a way, you're borrowing against your own money.
That $100,000 in home equity you built up was a good thing. You now have a monthly payment on your home equity loan, but your net worth hasn't really gone up. You just moved money from one column to another. That's great if the investment property makes money. If it doesn't, or if you have to deal with long periods of vacancy or big repairs, you still have to make that home equity loan payment every month.
If you own two properties and have to pay off debt on both of them, you are at risk of changes in the housing market in both areas. If the housing market slows down, which is already happening in some areas, you could end up with a situation where the value of your primary home goes down (which lowers your equity cushion), the value of your investment property goes down (which limits your exit strategies), and both properties become harder to refinance or sell.
In the second quarter of 2025, 27 states lost money on their equity, with Hawaii losing the most (-$65,900) and Washington D.C. losing the least. (-$34,400) and Florida (-$32,100) for each homeowner (Cotality Q2 2025). If you had bought an investment property in any of these markets a year ago using the equity in your home, you would now be losing equity on both properties at the same time.
Let's be very clear about what you're getting into: your main home has a primary mortgage, your main home has a home equity loan (second mortgage), and your investment or second property has a primary mortgage.
That's three different loan terms, three different interest rates, and three different monthly payments to keep track of. If you miss a payment on any of them, your credit score will go down. And here's something people don't always know: if you can't pay back your home equity loan, your main home is at risk, even if the problem is with the cash flow from the investment property.
The Mortgage Reports says that investment property mortgage rates are usually 0.5% to 0.75% higher than rates for primary residences. Even though your primary mortgage may have a good rate, the loan for your investment property will cost you more.
Also, most investment properties need a down payment of at least 20–25% (sometimes 15%, but expect higher rates), a credit score of at least 680 (720 for the best rates), cash reserves that cover at least six months of mortgage payments on all properties, and proof of rental income if you plan to use that to qualify.
If you're buying the second property as an investment, lenders usually only count 75% of the expected rental income when they figure out your debt-to-income ratio for qualification. And that's if you can even count rental income—many lenders won't unless you have a lease or proof of rental history.
You might think, "The rental income will cover the mortgage," but the lender might not give you full credit for that income when deciding if you can get the loan.
This is when I use a calculator with clients because the amount they can borrow in theory and the amount that makes sense in practice can be very different.
This is the formula that most lenders use:
Maximum Home Equity Loan = (80% of Home Value) – Current Mortgage Balance
For borrowers with good credit (usually 760 or higher), some lenders will go up to 85% or even 90%, but 80% is the norm.
Your Borrowing Capacity: The most you can borrow is $460,000 times 80%, which is $368,000. If you take away your current mortgage, you have $123,000 left.
That doesn't include the costs of maintaining either property, such as property taxes, insurance, HOA fees, or maintenance. And if the investment property is empty for a few months, you're paying for all that $3,622 out of your regular income.
You shouldn't borrow $123,000 just because you can. Forget what I said before; I mean that being able to borrow money and being smart about borrowing money are two different things. I've seen how buying too much real estate can cause stress.
Think about emergency reserve rules (for example, you should have at least six months' worth of mortgage payments in liquid reserves, which is $21,732 that you shouldn't touch), the 1% maintenance rule (which means you should budget 1% of each property's value each year for maintenance, which is about $620 a month for these two properties), vacancy cushions (which means you should be able to cover all three mortgages for three to six months if the property sits empty), and debt-to-income ratios (which means most lenders want total debt payments to be less than 43% of gross monthly income).
If your debt-to-income ratio (DTI) is 40%, you would need to make at least $9,055 a month, or about $108,660 a year, to comfortably pay your mortgage payments of $3,622.
Before you decide to go with a home equity loan, let me show you some other options that might be better for you.
A HELOC is like a credit card backed by your home, not a lump-sum loan. You can borrow money up to your credit limit during the "draw period," which is usually 10 years. You only pay interest on what you use, which is a plus.
As of October 2025, the average HELOC rate is about 8.14%, which is a little higher than the average home equity loan rate but still much lower than the average unsecured loan rate (Bankrate, May 2025). One bad thing about HELOCs is that their rates change with the prime rate. This means that if the Federal Reserve raises rates, your payment could go up. The interest rates on home equity loans are fixed and won't change.
This choice gives you a bigger mortgage than the one you already have, and you get the extra money in cash. The best thing is that you only have to make one mortgage payment on your main home instead of two.
Instead of keeping your $245,000 mortgage at 3.5% and getting a $60,000 home equity loan at 8.11%, you could do a cash-out refinance for $305,000, as we showed before. If the current refinance rate is about 6.8%, your new monthly payment would be about $1,993, which is less than what you pay now ($1,450) plus the home equity loan payment ($578), which is $2,028.
You're giving up that low 3.5% rate on most of your loan balance and extending the time you have to pay it back. You'd be starting over on a 30-year loan, which means you'd pay more interest over time even though your monthly payment is lower.
It may seem boring compared to using your equity, but sometimes the simplest solution is the best one. If you can save up a down payment in 12 to 18 months, you won't have to take on any home equity debt at all, and your main home will be less leveraged.
In the second quarter of 2025, real estate investors bought 33% of single-family homes, the highest percentage in five years (BatchData Q2 2025 Report). I've noticed that "mom-and-pop" investors who only own a few properties are much more patient than institutional investors. They are also more likely to wait for the right deal instead of putting themselves in a bad financial situation.
Hard money loans can be a good choice for investors who want to flip properties quickly, even though they have high interest rates (usually 10% to 15%). These loans are short-term (6 to 24 months) and are backed by the property you're buying, not your main home.
The best thing is that your main home stays safe. If the flip goes wrong, your family's home is safe. The bad thing is that it costs a lot and takes a short amount of time—you need to finish the renovation and sell it quickly.
Under some market conditions, sellers might be willing to pay for part of the purchase themselves. This happened a lot more from 2008 to 2012, when it was hard to get traditional loans. I'm starting to see it happen again in 2025 as some markets cool off.
Terms can be very different, but usually you put down a down payment (usually 10–20%) and the seller carries a note for the rest of the money. Interest rates are usually higher than those on regular mortgages but lower than those on hard money loans. The hardest part is finding sellers who are willing to do this, which usually happens when they can't sell through regular means.
There is no one right answer to this. If you have the right amount of money and know what you're getting into, using the equity in your home to buy another one can be a great way to build wealth.
The people I've seen succeed with this method usually have a steady, strong income that can handle financial shocks, a lot of cash on hand beyond what they borrow, have done a lot of research on the second property's location and rental market, are comfortable managing multiple debts and properties, have realistic expectations about rental income and vacancy rates, and see the investment as a long-term one.
People who have trouble usually don't have enough money, expect everything to go perfectly, or haven't set aside enough money for the problems that come with owning property.
The numbers can definitely work because the average homeowner has $307,000 in equity and the rates on home equity loans are 8.11%, which is much lower than the rates on credit cards or personal loans. But numbers aren't the only thing that matters. The interest rate you pay is important, but so are your risk tolerance, personal situation, investment goals, and ability to handle market ups and downs.
If you're thinking about moving forward, I suggest that you make detailed financial projections, including the worst-case scenarios. You should also talk to a tax professional about the effects, do a lot of research on the market, get to know property managers if you're buying out of state, keep at least 25% equity in your primary home even after the home equity loan, and make sure you're not sacrificing your retirement savings or emergency reserves.
I've seen investors in Louisville use this strategy and do well and not so well. People who plan carefully and carry out their plans slowly are the ones who do well. AmeriSave can help you figure out how much you can borrow, what the current rates are, and what your total monthly payments would be if you want to look into your home equity options or talk about whether this strategy is right for you.
Do you want to know more about refinancing or getting to your home's equity? For more guides and tools to help you feel good about your mortgage choices, go to AmeriSave's Learning Center.
It all depends on how you plan to use the money and how much you can handle changes in interest rates. A home equity loan is better if you need a certain amount for a down payment and closing costs because you get that amount at a fixed rate. Your payments stay the same for the whole loan term, which makes it easier to budget when you own more than one property. A HELOC lets you borrow money as you need it and only pay interest on what you use. This is helpful if you're planning renovations but aren't sure how much you'll need over time. The problem with HELOCs is that their rates change based on the prime rate. The average HELOC rate is 8.14% as of October 2025, but your monthly payment could go up if the Federal Reserve raises rates. I've seen HELOCs work great for experienced investors, but for people buying a second home for the first time, I usually prefer the predictability of a fixed-rate home equity loan.
Yes, but you should be careful about how you tell your lender what kind of property it is. The IRS sees a property as an investment property for tax purposes if you plan to rent it out for more than 14 days a year, even if you also use it yourself. But lenders have their own rules. If you use the property yourself for more than 14 days a year or more than 10% of the days it's rented, it might be considered a "second home" for lending purposes. This usually means better rates than a regular investment property. Airbnb and short-term rentals are in a gray area. Some lenders will call it a second home if you promise to use it yourself. Some people automatically see any property with planned rental income as an investment property and charge more for it. You should be honest about what you want to do from the start. Before you buy, make sure to check with the HOA and local government to see if there are any rules about short-term rentals.
When you sell your main home, you will have to pay off the home equity loan, just like you did with your first mortgage. The property secures both loans, which means they are liens that must be paid off before the title can change hands. Here's how it works: if you sell your house for $480,000 and owe $220,000 on your primary mortgage and $45,000 on your home equity loan, the title company uses the money from the sale to pay off both loans ($265,000 total). After closing costs and commissions, you get to keep the rest. People get into trouble when they borrow too much money and the sale price doesn't even cover their loans and costs. I had a client who had to sell quickly because they had to move for work. The market had softened just enough that they only got $12,000 instead of the $60,000 they were expecting after paying off both mortgages and closing costs. That's why I think you should keep at least 20% equity in your home even after you get a home equity loan.
Closing costs for a home equity loan usually range from 2% to 5% of the loan amount. However, they are usually lower than closing costs for a primary mortgage. You could pay between $1,000 and $2,500 for a $50,000 home equity loan. You are paying for an appraisal (usually $400–600), origination fees (sometimes 1% of the loan amount), title search and insurance (around $500–700), recording fees for your county, and maybe even credit report fees. Some lenders say they offer "no closing cost" home equity loans, but be sure to read the fine print. Usually, they add those costs to a slightly higher interest rate over the life of the loan. How long you plan to keep the loan will determine if that's a good deal. Paying closing costs up front might be cheaper if you plan to sell or refinance in a few years. If you plan to keep it for the full term, including the costs in the rate might be a good idea.
Yes, for sure. This is where I see new investors make big mistakes. When you have a tenant, your rental income may cover the mortgage, but there will still be gaps. The average rental property is empty for 8 to 10 percent of the year, which means it doesn't make any money for one to two months. You still have to pay the mortgage on the investment property, the home equity loan, and the main mortgage during that time. You need more than just a vacancy; you need money for repairs. If the HVAC system breaks down in your rental property, you'll have to pay $3,000 to $8,000 to fix it, and you can't wait until you have a tenant to do it. I suggest that you keep at least six months' worth of the investment property's total housing costs (mortgage, insurance, property taxes, and HOA fees) in a separate savings account. If you have a $1,600 mortgage and $400 in other costs each month, you need $12,000 in reserves. The investors I've worked with who have done well have always had too much money at the start. The ones who have trouble are the ones who have very little money and lose everything because of a big repair or a three-month vacancy.
This is why you should talk to a tax professional before making these choices. The Tax Cuts and Jobs Act of 2017 changed the rules for mortgage interest deductions in a big way. These rules are hard to understand when you're using equity from one property to buy another. The IRS says that you can usually deduct the interest on a home equity loan if the loan is used to "buy, build, or substantially improve" the home that secures the loan. If you take out a home equity loan on your main home and use it to fix it up, the interest is usually tax-deductible. But the rules are less clear if you use it to buy a different property. Some tax experts say that if you use a home equity loan to buy an investment property, the interest isn't tax-deductible because the loan is secured by your primary residence. The mortgage on the investment property is different; the interest is usually deductible as a business expense on Schedule E. However, the rules are a little different when it comes to being actively involved and using the property for personal purposes. Before you make any guesses about tax deductions, talk to a CPA who knows a lot about investing in real estate.
There are a few ways that getting a home equity loan can hurt your credit score. The lender will do a hard inquiry when you apply, which could lower your score by a few points for a short time. Your credit utilization ratio changes when the loan is funded because your total debt load goes up. That could lower your score by 10 to 30 points at first, but the exact effect will depend on your overall credit profile. But if you pay all of your bills on time—and now you're making three mortgage payments instead of one—you're building a good payment history on several accounts, which will help your score over time. Your credit score isn't the most important thing; your ability to get credit in the future is. Lenders may be less likely to give you another loan if you have a lot of debt on more than one property, even if your score stays high. I have worked with investors who have great credit scores but can't get a fourth mortgage because their debt-to-income ratio is too high.
I get why you might want to wait for rates to go down. The Federal Reserve has hinted that interest rates may go down later in 2025. Home equity loan rates have already dropped from their 2024 highs, and they are now 8.11% nationally, down from almost 9% at the start of 2024. But it's almost impossible to get the timing of interest rates just right, and you might miss good chances while you wait. It might make more sense to move forward if you've found the right investment property at the right price and the numbers work at today's rates. If rates go down a lot, you can always refinance the home equity loan later, but you'll have to pay closing costs again. The bigger question is whether the chance to buy real estate is interesting in and of itself. In the second quarter of 2025, real estate investors bought 33% of homes, making the market competitive. Waiting six months for rates to maybe drop a quarter-point could mean missing out on a property that makes a lot of money from rent or is in a high-demand area. We can help you plan for different situations so you can make a smart choice based on what you know about your own situation instead of trying to guess what will happen.
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