Borrowing Money for a Down Payment: How and When to Do It
Before you decide on borrowing money for your down payment, it’s important to weigh the pros and cons of each option.
Take out a HELOC or home equity loan for a down payment
One option to find the cash for a new home is to get a home equity line of credit (HELOC) or a home equity loan (HEL) against your current home. The idea is to pay off the loan or line of credit when you sell the property.
A HELOC is a revolving line of credit that works like a credit card. Using a HELOC for a down payment allows you to:
- Pay interest only on the amount you draw.
- Use as much (or as little) of the credit line as you need during the draw period, which usually lasts 10 years.
- Pay the balance to zero and charge it again during the draw period.
- Make principal and interest payments on the remaining balance for up to 20 years when the draw period ends and the repayment period starts.
Tap your retirement savings
Retirement savings are designed to see you through your golden years — not bankroll big-ticket purchases. But if the path to those years includes homeownership, you may want to use those savings to purchase a home.
Get a bridge loan
Your local bank or credit union may offer short-term bridge loans so you can take equity out of a home you’re selling to buy a new home. Bridge loans come in handy if you’re in a tight housing market where sellers aren’t willing to accept an offer that’s dependent on selling your home first.
There are two different types of bridge loans: a first-mortgage bridge loan and a second-mortgage bridge loan.
- First-mortgage bridge loan. You’ll take out one large loan — typically up to 80% of your current home’s value. After your current loan balance is paid off, the difference can be used as a down payment on your new home.
If you have a 401(k) account, you can take out a 401(k) loan for your down payment. A 401(k) loan allows you to take a distribution you can repay over time. You can borrow up to 50% of your account balance or $50,000, whichever is less, according to the IRS. Consult a financial planner or an accountant before taking a loan or a distribution.
Explore down payment assistance programs
If you aren’t able to borrow money for a down payment, find out if you qualify for a down payment assistance (DPA) program. Begin the search at the state level with this handy tool from the U.S. Department of Housing and Urban Development.
You may qualify for grants, second mortgage programs or even first-mortgage DPA loans through a local bank. However, some programs may have income limits and additional guidelines for how long you have to remain in the home in order to qualify.