Can You Use a HELOC for a Down Payment on a Home For Your Child?

The reality of today’s housing market means young buyers are struggling to afford a down payment on their first home.

Parents who have built equity in their own homes may wonder: Can you use a HELOC for a down payment to help your children purchase a home?

The answer is yes—but it’s a good idea to understand the best ways to use a HELOC.

The cost of housing in today’s real estate market

The median price for existing single-family homes reached $404,400 in December 2024. This is a 6.0% increase from December 2023.

Regional variations

• Northeast median price: $478,900 (+11.8% year-over-year)
• Midwest median price: $298,600 (+9.0% year-over-year)
• South median price: $361,800 (+3.4% year-over-year)
• West median price: $614,500 (+6.0% year-over-year)

With prices like these, is it any wonder why many homeowners use a home equity line of credit (HELOC) to assist their kids with buying a home?

However, if you consider this strategy, it’s important to understand the benefits, risks, and financial implications.

Let’s explore how a HELOC works, the pros and cons of using one for a down payment, and key factors to consider before borrowing.

How a HELOC works

Homeowners use a home equity line of credit (HELOC) to borrow against the equity in their homes.

HELOCs aren’t like traditional loans—they function as a revolving line of credit, much like how a credit card works. You withdraw funds as needed, repay them, and borrow again if you like.

Key features of a HELOC:

• Credit limit based on home equity: Lenders typically allow homeowners to borrow a maximum of 85% of their home’s equity minus any outstanding mortgage balance.
• Draw period and repayment phase: The draw period (5–10 years is the average) allows borrowers to access funds, followed by a repayment period (10–20 years with most agreements).
• Variable interest rates: Most HELOCs have adjustable interest rates, which can fluctuate over time.

Parents can use a HELOC to tap into their home’s equity and provide a lump sum or ongoing financial support for their child’s home purchase.

Pros of using a HELOC for a down payment

1. Access to low-interest funds

HELOCs often have lower interest rates than personal loans or credit cards. This makes them a cost-effective way to provide financial assistance without resorting to high-interest borrowing options.

2. Flexible borrowing and repayment

A HELOC allows homeowners to withdraw only the needed amount rather than forcing a lump-sum loan. This flexibility helps parents manage their cash flow while ensuring they provide the right amount of financial support.

3. No restrictions on usage

Unlike some loan types, HELOC funds can be used for any purpose, including down payment assistance for a child. No lender restrictions dictate how your equity loan money must be spent.

4. Potential for long-term investment

Helping your child buy a home can be a long-term financial strategy. If the housing market appreciates, your child’s home may increase in value, strengthening their financial position.

Cons of using a HELOC for a down payment

1. Increased financial risk

A home always secures HELOCs. Failing to make payments could put that home at risk of foreclosure. Always carefully assess your ability to repay before committing to this option.

2. Variable interest rates

HELOCs have adjustable interest rates, meaning monthly payments could rise or fall. Budgeting with this type of uncertainty can be tricky for some people.

3. Impact on your credit and borrowing power

Taking out any type of new loan will increase your debt-to-income ratio (DTI). This may affect your ability to qualify for other loans or refinance a mortgage.

4. Potential for family tension

Mixing family and finances can sometimes strain relationships. If your child struggles with homeownership costs, they may have difficulty repaying you—which might translate into making the payments yourself.

Alternative ways to help your child buy a home

If using a HELOC feels too risky, consider these alternative ways to support your child’s home purchase.

1. Gifting a down payment

Parents can provide a monetary gift for a down payment if they have the funds available.

However, lenders typically require a formal letter stating that the funds are not a loan to ensure the child won’t have to repay the money.

2. Co-signing the mortgage

By co-signing, parents help their child qualify for a mortgage by adding their income and credit strength to the loan application.

However, parents are legally responsible for the house if payments are missed.

3. Setting up a family loan

Instead of using a HELOC, parents can loan money directly to their child, setting repayment terms that work for both parties.

This avoids lender restrictions, keeps interest costs within the family, abut it can also lead to family tensions if expectations aren’t clearly defined.

Before using a HELOC for a down payment, ask yourself the following questions:

1. Can I comfortably afford the additional debt? Ensure your budget allows for HELOC payments without straining your finances.
2. What happens if interest rates rise? Consider how variable rates could impact your monthly payments over time.
3. Will this affect my retirement plans? Borrowing against home equity could delay retirement goals if repayment extends into later years.
4. Is my child financially ready for homeownership? Ensure they have a stable income, good credit, and the ability to handle homeownership costs beyond the down payment.

Using a HELOC for a downpayment: The bottom line

So, can you use a HELOC to make a down payment for your child’s home?

While a HELOC offers competitive interest rates and flexible financing, it also has potential downsides that must be considered.

One of the easiest ways to discover your home equity options is to fill out HomeEQ’s fully digital online application.

In a few minutes, our system will let you know if you’re approved for a HELOC and the amount available.

Apply for a HELOC with HomeEQ today.