Using Your Home Equity: Funding a Down Payment on Your Next Home

May 29, 2025

Ready to climb that housing ladder? Instead of emptying your savings, think of your current home as a piggy bank. Every mortgage payment you’ve made has built equity – that stake of your house you truly “own.” In Virginia or North Carolina, homeowners can tap this equity to help cover the down payment on their next home. We’ll cover the main strategies (home equity loans, HELOCs, and cash-out refinances), explain how to calculate usable equity and how much to leave behind, compare the pros and cons of each, and share tips to use the funds wisely. Let’s dive in with confidence and a dash of fun.


How Home Equity Works and How Much You Can Tap


Your home equity is simply your home’s current market value minus what you still owe on the mortgage. For example, if your house is worth $400,000 and you owe $250,000, your equity is $150,000. To figure out how much of that is usable, many lenders cap loans at around 80% of your home’s value. That means you subtract your mortgage from 80% of the value. In the example above, 80% of $400,000 is $320,000, minus $250,000 owed leaves about $70,000 available to borrow.


Calculating usable equity:

  • Estimate your home’s current appraised value.

  • Multiply by your lender’s maximum loan-to-value (LTV) cap (often 80–85%).

  • Subtract your remaining mortgage balance.

This final number is the tappable equity you could borrow. (In our example: 0.80 × $400k – $250k = $70k available.) Bear in mind, you generally won’t be allowed to borrow 100% of your equity (except rare cases like VA loans). Most lenders stop at 80–85% LTV, effectively requiring you to keep at least 15–20% equity in the house.


How much to keep: It's wise to preserve a buffer. Many lenders require you to hold onto at least 15–20% equity (keeping your total loans at or below ~80% of value). Practically, that means if you tap equity, leave at least 10–20% of value untouched. This cushion protects you from market ups and downs, and may help you avoid private mortgage insurance or meet loan rules.


Option 1:


Option 1: Home Equity Loan (VA)


A home equity loan (sometimes called a “second mortgage”) gives you a one-time lump sum based on your equity. It comes with a fixed interest rate and fixed monthly payment, usually over 5–30 years. In Virginia you might see searches like “home equity loan VA” – just meaning a Virginia home equity loan. It works like this: you borrow a set amount (say $50,000) and repay it in equal installments, separate from your first mortgage. Use it for any purpose – in our case, funnel it into the down payment on your new home.

  • How it works: You apply to borrow up to a percentage of your equity. The lender bases your loan on your home’s value minus your current balance. Once approved, you get the cash (minus closing costs) and begin monthly repayments on both the original mortgage and this new loan.

Pros of a Home Equity Loan


  • Predictable payments: Because the rate is fixed, your monthly payment never changes. This makes budgeting easy – no surprises if interest rates rise.

  • Lower rates than credit cards: Home equity loans typically have much lower interest than unsecured debt. Since your home is collateral, lenders can offer cheaper rates (often similar to or a bit above your mortgage rate).

  • Large lump sum: You get the full amount upfront. If your equity is substantial, you can borrow a large sum (often up to 80–85% LTV) all at once, which could cover a big down payment.

  • Long repayment terms: Loans often stretch over 10–30 years, so even a large loan can have manageable monthly payments.


Cons of a Home Equity Loan


  • You risk your home: Like any mortgage, if you can’t pay it back, the lender could foreclose on your house. This is serious – make sure you’re comfortable with the added debt.

  • Qualification rules: Typically you need at least ~20% equity to even apply. If you have little equity now, you might have to wait until you’ve paid down more of your mortgage.

  • Closing costs: Expect fees (appraisal, origination, etc.) of 2–6% of the loan amount, much like a regular mortgage refinance.

  • Extra payment: You’ll have two house payments – your original mortgage and this new one – so double-check your budget fits the higher cash flow.




Option 2: Home Equity Line of Credit (HELOC)


A HELOCis like a credit card secured by your home. You get a maximum credit limit (often up to ~85% of home value minus what you owe) and can draw funds as needed during a “draw period” (say 5–10 years). You only pay interest on the amount you borrow, not the full credit line. It’s super flexible: take $10,000 for the down payment, then later tap more if needed for closing costs or reno projects, up to your limit.


  • How it works: Apply with your lender; they’ll usually cap your line at a certain LTV (around 85%). During the draw period, you pay interest-only on your current balance. After that, you enter a repayment period (10–20 years) and begin paying principal + interest until it’s gone.


Pros of a HELOC


  • Flexible access: You can borrow as little or as much as you want (up to your limit) and you only pay interest on what you use. For example, if your credit line is $100k but you only use $30k, your monthly payment is based on $30k. This makes budgeting easier than a big lump loan.

  • Funds for anything: A HELOC can be used for any purpose, including a down payment. You could even pull extra cash to cover moving expenses, improvements, or consolidate high-interest debts.

  • Keeps your first mortgage: Unlike a refinance, a HELOC does not disturb your original loan. This is great if you locked in a low rate or are almost done paying off your mortgage. You continue the old mortgage as is.

  • Larger borrowing potential: Depending on your equity and credit, you might get approved for a substantial line (sometimes 80–90% of value). In some cases, lenders allow borrowing up to 85% or even 90% of your home’s value.









Cons of a HELOC


  • Variable interest rates: Most HELOCs have variable rates. If interest rates rise, your payments can jump, making your budget tighter. Locking in a fixed-rate second mortgage avoids this uncertainty, but that’s not an option with a standard HELOC.

  • Risk to your home: Like other mortgages, failure to repay a HELOC risks foreclosure. You’re putting your house on the line for a credit line.

  • Multiple payments: Using a HELOC means juggling (at least) two home-related payments: your original mortgage and the HELOC interest/principal. And once you buy the new home, you’ll also have that mortgage payment. In effect, you could have three house-related payments at once. Make sure you can handle that cash flow.

  • Draw vs. repayment phases: In the draw phase you pay interest only. But once the repayment phase hits, you must pay principal, so your monthly bill jumps. Plan for that change.

  • Closing costs: HELOCs typically have fees of around 2–5% of the credit line (similar to a mortgage).

  • Stricter rules for investment use: If the next home is a rental or investment, some lenders impose tougher credit or equity requirements on a HELOC.


Option 3: Cash-Out Refinance (NC)


A cash-out refinance replaces your current mortgage with a new, larger mortgage. You’ll owe a bigger balance, but you receive the extra as cash. For example, if you owe $200,000 on a $300,000 house, you might refinance for $250,000, paying off the old $200k loan and pocketing $50k in cash for a down payment. In North Carolina (NC), you might see this called a “cash-out refinance NC”. It’s a popular way to leverage equity.


  • How it works: You apply for a new mortgage (often 30-year), qualify with a new appraisal and underwriting, and if approved you get a lump-sum cash payout. Now your mortgage balance is higher by that payout amount.


Pros of a Cash-Out Refinance


  • Single mortgage: You’ll have one loan and one monthly payment instead of two. This can simplify finances versus a second mortgage.

  • Lower interest possibility: If current mortgage rates are below your old rate, you could score a better rate on the larger loan. This means even with a bigger loan, your rate might drop. Bankrate notes cash-out refis “generally have lower interest rates and are easier to qualify for” than home equity loans, making them attractive if your credit is spotty.

  • Tax-deductible interest: Since it’s a mortgage, the interest is typically tax-deductible (though only on the portion used to buy, build or improve your home). If you’re buying a new home, this may not apply to the down-payment portion – check a tax advisor.

  • Large lump sum: You get all needed cash at closing. This is handy if you want a big down payment immediately or need to pay off debts as part of the purchase.





Cons of a Cash-Out Refinance


  • Closing costs and time: Expect 2–6% of the loan amount in closing fees, and the process can take 30–60 days. If you need money quickly, plan ahead – cash-out is slower than a HELOC.

  • One higher payment: Your mortgage balance jumps. Even if the rate drops a bit, your monthly payment usually rises. Make sure this fits your budget.

  • Harder to qualify: Lenders may require a higher credit score (often 620+), lower debt-to-income, and may insist you have several months of cash reserves in the bank. You also need sufficient equity (often 20%+) to be approved.

  • Complex process: You’ll go through another full underwriting (appraisals, docs, etc.), which means more paperwork and waiting.

  • Higher interest than a rate-term refi: Typically a cash-out refinance has a slightly higher rate than a simple rate/term refi, because you’re taking cash out. In other words, it’s more expensive than a straight refinance for the same loan size.


Comparing the Options


  • Equity Loan (VA) – Good if you want a fixed rate and fixed payment, and don’t want to disturb your current mortgage. You borrow one lump sum, ideal if you need a specific amount for a down payment. Drawback: you’ll have two mortgage payments (old and new) each month, and you must qualify with enough equity.

  • HELOC – Great for flexibility. Like a credit card on your home, it lets you borrow again up to a limit and pay only on what you use. It preserves your low first-mortgage rate, and you could cover a range of expenses (even renovations). But it’s riskier: rates can rise and you’ll juggle multiple payments.

  • Cash-Out Refinance (NC) – Good if current mortgage rates are lower than your old rate and you want one payment. You replace the old loan with a bigger one, possibly at a better interest rate, and get cash all at once. Drawbacks: higher closing costs, more paperwork, and you “reset” your mortgage term (often back to 30 years). If you already have a great rate or are close to paying off the house, a cash-out refinance might not be worth it.

Quick tips:

  • Lenders usually let you tap up to ~80–85% of your home’s value (keeping ~15–20% equity). Plan to leave that buffer.

  • Compare rates and costs: shop with multiple lenders. A small rate difference can save big bucks over time.

  • Account for closing costs: set aside a few thousand (2–6% of loan) so you’re not caught off guard.

  • Keep emergency funds: don’t spend your entire savings or equity. Maintain 2–6 months of mortgage payments in reserve, as some lenders require and you’ll sleep better too.

  • Use funds wisely: direct them strictly toward your down payment (and maybe essential costs like moving or repairs). Avoid treating these proceeds like extra salary – overspending can lead to long-term strain.

Pros and Cons at a Glance


  • Home Equity Loan (Fixed second mortgage):
           Pros: Fixed rate, predictable payments, potentially large loan, lower rates than credit cards.
           Cons: Uses home as collateral (foreclosure risk), two payments, fees, needs ~20% equity.

  • HELOC (Home Equity Line of Credit):
           Pros: Flexible access, pay interest only on what you borrow, keeps first mortgage intact, may get high limit.
               Cons: Variable rate (payment can rise), complex repayment stages, fees (2–5% of limit), house at risk if you default.

  • Cash-Out Refinance:
           Pros: Single loan/payment, possibly lower interest rate, get lump-sum cash, interest potentially deductible (on       qualifying use).
               Cons: High closing costs (2–6%), new higher balance (higher payment), strict qualification, no more low-rate     mortgage if you had one.

Using Your Equity Wisely

Tapping your home’s equity is a powerful move, but it’s crucial to stay responsible. Here are some final tips:


  • Use it for the big stuff: Home equity borrowed funds should ideally go toward things that improve your financial outlook – like a down payment to get a lower mortgage rate or avoid PMI, consolidating high-interest debt, or making value-adding renovations. Resist using it for nonessentials.

  • Keep a buffer: Don’t borrow every last dollar you qualify for. Maintain some equity and cash cushion. Remember lenders often want you to still have several months of mortgage payments saved.

  • Plan your budget: After borrowing, you’ll have new monthly obligations. Double-check that adding the loan/HELOC payment still fits comfortably with your income and expenses.

  • Shop around: Rates and fees vary. Get quotes for a “home equity loan VA” and “cash-out refinance NC” from different lenders or credit unions. As Dash Home Loans advises, compare at least three lenders before deciding.

  • Think long-term: Borrowing more now means paying interest for years. Make sure the move (buying a new house with a bigger down payment) is worth the long-term cost.

Your home has already done much of the work by building equity – now it’s your turn to use it smartly. With careful planning, one of these equity strategies can make that down payment much easier to manage.


In the end, remember: your home is a tool in your financial journey. Use it wisely and confidently. If you have questions or want to explore your options, our team at Sparrow Home Loans is here to help. Reach out to us, and together we’ll find the best path for your next home purchase. You’ve built up this equity; now it can work for you as you make your next move!


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