Using a HELOC for an Investment Property Down Payment: Smart Strategy or Risky Move?

You've built up equity in your home. Now you're eyeing a rental property or a flip. The question pops up: can you tap your HELOC to cover the down payment?

Short answer — yes, many investors do exactly this. But the details matter. Lenders look at this arrangement differently than a standard home purchase, and the math needs to work on both sides of the equation.

This guide walks through how it works, what lenders require, what the real costs look like, and when it makes sense versus when it doesn't.

How Using a HELOC for a Down Payment Actually Works

Here's the basic mechanics. You have a HELOC on your primary residence. You draw from it to cover part or all of the down payment on an investment property. Then you get a separate mortgage on the investment property itself.

You end up with three obligations:

1. Your primary mortgage
2. Your HELOC (now with a balance)
3. A new mortgage on the investment property

The investment property's rental income (ideally) covers its mortgage and then some. The surplus helps you pay down the HELOC balance.

A Quick Example

Say your primary home is worth $500,000 and you owe $300,000. You have a HELOC with a $100,000 limit. You find a rental property listed at $300,000.

Investment property lenders typically require 20-25% down for non-owner-occupied properties. That's $60,000-$75,000.

You draw $65,000 from your HELOC. You put that down on the rental property and finance $235,000 with an investment property mortgage.

Now your monthly obligations look something like:

• Primary mortgage: $1,800/month (existing)
• HELOC payment: ~$540/month (on $65,000 at 9.5% interest-only)
• [Investment mortgage](/blog/best-investment-property-lenders-2026): ~$1,650/month (on $235,000 at 7.5%, 30-year)
• Total: $3,990/month

If the rental brings in $2,400/month, your net cost for the investment property is roughly $1,650 + $540 − $2,400 = −$210. You're actually cash-flow negative by $210/month before maintenance and vacancies.

That's a realistic scenario. Not every deal pencils out.

What Lenders Look at When You Use HELOC Funds

Here's where people get tripped up. The investment property lender knows the down payment came from somewhere. They're going to look at:

[Debt-to-Income Ratio](/blog/dti-ratio-explained) (DTI)

The HELOC payment counts against your DTI. Most conventional lenders want your total DTI under 45%. Some go to 50% for strong borrowers.

If your gross monthly income is $10,000, your total debt payments (primary mortgage + HELOC + new mortgage + car payments + student loans + minimum credit card payments) need to stay under $4,500.

The HELOC draw increases your DTI because it creates a new monthly obligation. Lenders calculate this using either the actual payment or, for variable-rate HELOCs, a qualifying rate that may be higher than your current rate.

Sourcing the Down Payment

Lenders require documentation showing where the down payment comes from. A HELOC draw shows up as a liability, not an asset. Some lenders are fine with this. Others aren't.

Fannie Mae and Freddie Mac guidelines allow HELOC funds for investment property down payments as long as the HELOC payment is included in DTI calculations. But individual lenders may have overlays (additional restrictions) that prohibit it.

Ask your lender upfront. Don't assume.

Reserves

[Investment property loans](/blog/best-dscr-lenders-2026) typically require 6 months of reserves — meaning you need 6 months of payments (for all properties) sitting in savings after closing. HELOC available credit usually doesn't count as reserves.

If your total monthly obligations across all properties are $3,990, you need roughly $24,000 in liquid reserves.

Credit Score Thresholds

For investment property conventional loans, you typically need a 680+ credit score for a 20% down payment, or 720+ for better rates. Opening a HELOC and drawing on it can temporarily ding your score by 5-15 points due to the hard inquiry and increased utilization.

Time it carefully if your score is borderline.

The Real Cost of Using a HELOC as a Bridge

A HELOC isn't free money. It's debt secured by your home. Here's what it actually costs:

Interest Rate Reality

As of early 2026, HELOC rates generally sit between 8.0% and 10.5%, depending on your credit score, LTV, and lender. These are variable rates, typically tied to the prime rate plus a margin.

If prime is at 7.5%, a typical HELOC might be prime + 1% = 8.5%.

On a $65,000 draw, that's roughly $5,525 in interest per year, or $460/month.

The Payback Timeline Matters Enormously

If you treat the HELOC like a 10-year loan and pay it down aggressively — say $900/month — you'll pay it off in about 8.5 years and spend roughly $27,000 in total interest.

If you make interest-only payments for the first 5 years (the typical draw period), then switch to principal + interest for the repayment period, total interest could exceed $40,000.

The faster you pay down the HELOC, the better the overall return on the investment property.

Comparing to Other Down Payment Sources

Tax Implications You Should Know

Tax law changed significantly with the Tax Cuts and Jobs Act (TCJA). Here's where things stand:

Interest deductibility on the HELOC: If the HELOC funds are used to acquire a property (even an investment property), the interest is generally deductible as investment interest expense. However, you can only deduct investment interest up to your net investment income. Unused deductions carry forward.

This is different from using a HELOC for personal expenses, where interest is not deductible unless the funds are used to buy, build, or substantially improve your primary home.

Consult a CPA. The interplay between HELOC interest deductions, rental income, depreciation, and passive activity loss rules gets complicated fast. A good CPA pays for themselves many times over.

When This Strategy Makes Sense

The HELOC-for-down-payment approach works best when:

1. The investment property cash flows positively even after accounting for the HELOC payment. If you're cash-flow negative, you're betting entirely on appreciation — which is speculation, not investing.

2. You have a clear payback plan. Ideally, you're paying off the HELOC within 3-5 years using rental income and/or other funds.

3. Your DTI has room. If you're already stretched at 40% DTI, adding a HELOC draw and an investment mortgage is going to push you over the edge.

4. You have adequate reserves. Beyond the 6 months lenders require, you should have a separate emergency fund for unexpected repairs, vacancies, and rate increases on the HELOC.

5. HELOC rates are reasonable relative to expected returns. If your HELOC is at 9% and the property's cap rate is 6%, you're losing money on the leveraged portion from day one.

When It Doesn't Make Sense

• You're counting on appreciation to bail you out. Markets go sideways and down too.
• The rental market in your target area is soft. High vacancy rates eat cash flow fast.
• You'd have zero liquidity after the purchase. That's a recipe for foreclosure on one or both properties if anything goes wrong.
• Your HELOC is in its repayment period. Payments jump significantly when you shift from interest-only to principal + interest.

Alternatives Worth Considering

Cash-Out Refinance Instead of a HELOC

A cash-out refi on your primary residence replaces your existing mortgage with a larger one and gives you the difference in cash. The rate is fixed, the payment is predictable, and there's no variable rate risk.

Downsides: higher closing costs ($3,000-$8,000), you restart your [mortgage amortization](/blog/amortization-schedule-guide), and rates on cash-out refis are typically 0.25-0.50% higher than rate-and-term refis.

Partner With Another Investor

Split the down payment and equity with a partner. Less leverage, but less risk. Make sure you get a proper operating agreement drafted by a real estate attorney.

Seller Financing

Some sellers, especially on older rental properties, will carry back a second mortgage. This can reduce or eliminate the need for a HELOC draw. Terms are negotiable.

House Hacking

Buy a 2-4 unit property as your primary residence. You only need 3.5-5% down with FHA or 5% with conventional. Live in one unit, rent the others. Build equity, then move out and repeat.

Step-by-Step: How to Execute This Strategy

1. Check your HELOC terms. Confirm your available credit, rate, draw period end date, and whether there are any restrictions on using funds for investment purposes.

2. Get pre-approved for the [investment property loan](/blog/dscr-loan-for-single-family) first. The lender will tell you what DTI looks like and whether they accept HELOC-sourced down payments.

3. Run the numbers conservatively. Use 8% vacancy, actual insurance quotes, real tax assessments, and budget 10% of rent for maintenance.

4. Draw from the HELOC close to closing. Don't draw 6 months early and pay interest on money sitting in your account.

5. Set up automatic aggressive payments on the HELOC. The faster you pay it off, the better your overall returns.

6. Track everything for taxes. Keep records of the HELOC draw, how funds were used, interest paid, and all rental income/expenses.

Frequently Asked Questions

Can I use a HELOC from my primary home to buy an investment property?

Yes. There's no rule preventing you from [using HELOC funds](/blog/heloc-draw-period-explained) for an investment property down payment. The key constraint is whether the investment property lender accepts HELOC-sourced funds and whether your DTI supports both payments.

Do lenders care where my down payment comes from?

Absolutely. Every mortgage lender requires a paper trail for your down payment. HELOC draws show up as liabilities, not assets. The lender will factor the HELOC payment into your DTI calculation.

What's the minimum down payment for an investment property?

For conventional financing, 15-25% depending on the property type and number of units. Most lenders require 20% minimum for single-family investment properties and 25% for 2-4 units. FHA and VA loans require owner-occupancy, so they don't apply to pure investment properties.

Is HELOC interest tax-deductible when used for investment property?

Generally, yes — HELOC interest used to acquire investment property is deductible as investment interest expense, subject to the net investment income limitation. This is a complex area; work with a CPA who understands real estate taxation.

What happens if my HELOC rate increases after I buy the investment property?

Your monthly HELOC cost goes up, which squeezes your cash flow. If your rental income barely covers expenses at current rates, a 2% rate increase could turn a break-even deal into a money loser. Stress-test your numbers at 2-3% above current rates.

Can I use a HELOC for a house flip instead of a rental?

Yes, many flippers use HELOCs for down payments or even full purchase prices on lower-cost properties. The risk is higher because flip timelines are tight — if the project drags, you're paying HELOC interest with no rental income to offset it.

Bottom Line

Using a HELOC for an investment property down payment is a legitimate strategy that thousands of real estate investors use successfully. It lets you leverage existing equity without selling your home or depleting savings.

But it works best when the numbers are conservative, you have a clear payback plan, and you're not stretching yourself thin across multiple properties. Run the math at today's rates and at rates 2% higher. If it still works, you've got a solid foundation.

The biggest mistake investors make isn't using leverage — it's using leverage without margins of safety. Keep reserves, keep cash flow positive, and treat the HELOC balance like a fire you're actively putting out.

Related Articles

• Investment Property Down Payment: Your Real Options in 2026
• [[Rental Property Depreciation](/blog/depreciation-real-estate-guide) Guide: How to Maximize Your Tax Deductions in 2026](/blog/depreciation-rental-property-guide)
• Using a HELOC as a Down Payment for Rental Property