If you own a home with equity in it, you have four main ways to turn that equity into cash: a home equity loan, a home equity line of credit (HELOC), a cash-out refinance, or, if you’re at least 62, a reverse mortgage. Each one puts the house up as collateral, but they differ in how the money reaches you, how you pay it back, and what the interest rate looks like. Borrowing money against your house is a serious financial step, so the right choice depends on how much you need, how you plan to use it, and how you want the repayment to work.
How Much You Can Actually Borrow
Your equity is the gap between what your home is worth and what you still owe on it. A house appraised at $400,000 with a $250,000 mortgage balance has $150,000 in equity. Lenders won’t let you touch all of it.
They use a loan-to-value ratio (LTV) to cap total secured debt against the property. Fannie Mae limits a cash-out refinance on a primary residence to 80% LTV. When you’re adding a second loan on top of an existing mortgage, the relevant figure is combined loan-to-value (CLTV), which counts every lien. Fannie Mae’s ceiling for subordinate financing on a primary residence is 90% CLTV.1Fannie Mae. Eligibility Matrix
Run the numbers on that $400,000 house. At 90% CLTV, total debt against the home can’t exceed $360,000. Subtract the $250,000 first mortgage, and you’re left with up to $110,000 available through a second lien.
What Lenders Look for Beyond Equity
Having equity isn’t enough. Federal rules require lenders to make a good-faith determination that you can repay, and that assessment must factor in your debt-to-income ratio.2eCFR. 12 CFR 1026.43 – Minimum Standards for Transactions Secured by a Dwelling Most lenders want DTI under 43%, though some programs stretch higher when other factors compensate.
A FICO score of 620 is a common minimum for approval.1Fannie Mae. Eligibility Matrix Higher scores get you better rates. Plan to hand over recent pay stubs, W-2s, and tax returns, and expect the lender to order a professional appraisal. Your property taxes and hazard insurance need to be current.
Home Equity Loan
A home equity loan is a second mortgage that delivers a single lump sum at closing. You pay it back in fixed monthly installments over a set term, commonly five to thirty years, at an interest rate locked in on day one. The payment doesn’t move. That predictability makes this option a natural fit for one-time expenses like a major renovation or consolidating higher-interest debt.
The loan creates a lien on your home. Miss enough payments and the lender can foreclose.3Consumer Financial Protection Bureau. What You Should Know About Home Equity Lines of Credit Because a home equity loan sits behind your first mortgage, the original lender gets paid first if the property is ever sold to cover debts.
Ask about prepayment penalties before you sign. Federal law bars them entirely on mortgages that don’t qualify as “qualified mortgages.” Qualified mortgages can carry a penalty only during the first three years, capped at 3% of the balance in year one, 2% in year two, and 1% in year three, with nothing allowed after that.4Office of the Law Revision Counsel. 15 USC 1639c – Minimum Standards for Residential Mortgage Loans
Home Equity Line of Credit
A HELOC works more like a credit card secured by your house. You get a credit line, not a lump sum, and you draw against it as needed. HELOCs run in two phases. The draw period, commonly about ten years, is when you can borrow up to your limit and may only owe interest on what you’ve used. Then comes the repayment period, when you pay down principal and interest on a set schedule.5Consumer Financial Protection Bureau. What You Should Know About Home Equity Lines of Credit
The rate is variable. Lenders typically calculate it by adding a margin to a benchmark index like the U.S. prime rate, so the rate and your payment shift as the index moves.5Consumer Financial Protection Bureau. What You Should Know About Home Equity Lines of Credit Your borrowing costs could climb significantly over the life of the line.
Federal law does provide one guardrail: every variable-rate credit contract secured by a dwelling must carry a maximum interest rate, and the lender has to disclose that ceiling before you open the account.6eCFR. 12 CFR 1026.40 – Requirements for Home Equity Plans Two HELOCs with the same starting rate can have very different lifetime caps, so compare them. As you pay the balance down, the credit becomes available again, which makes a HELOC useful for ongoing or unpredictable expenses.
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a new, larger one. The new lender pays off the old loan, and you pocket the difference. You end up with a single monthly payment under new terms, including a new rate and a new term. This route makes the most sense when today’s rates are lower than what you’re currently paying, because you can pull cash out and cut your rate at the same time.
There are seasoning rules. Fannie Mae requires that at least one borrower has been on title for at least six months before the new loan funds, and any existing first mortgage being paid off must be at least twelve months old, measured note date to note date.7Fannie Mae. Cash-Out Refinance Transactions Homes acquired by inheritance or awarded in a divorce are treated as exceptions.
The catch is scale. The lender underwrites the whole new mortgage, not just the cash you’re extracting, and closing costs of 2% to 5% apply to the full new balance. On a large loan, that dwarfs what you’d pay on a smaller second lien. Compare the total closing costs against whatever rate savings you’re gaining before deciding.
Reverse Mortgage for Homeowners 62 and Older
The Home Equity Conversion Mortgage (HECM) is a federally insured reverse mortgage for homeowners aged 62 and up.8Office of the Law Revision Counsel. 12 USC 1715z-20 – Insurance of Home Equity Conversion Mortgages for Elderly Homeowners The lender pays you, not the other way around. You can take the money as a lump sum, monthly payments, a line of credit, or a mix. The balance grows over time as interest and fees add to what you’ve drawn.
You don’t repay the loan until the last surviving borrower dies, sells the home, or moves out for good. Federal rules state that if a borrower is out of the property for more than twelve consecutive months because of physical or mental illness, and no co-borrower still lives there, the loan comes due.9eCFR. 24 CFR Part 206 – Home Equity Conversion Mortgage Insurance You still have to pay property taxes and homeowners insurance and keep the home in reasonable condition.
A HECM is a non-recourse loan by federal regulation.10eCFR. 12 CFR 226.33 – Requirements for Reverse Mortgages Neither you nor your heirs will ever owe more than the home is worth when the loan comes due. If the balance has outgrown the sale price, FHA insurance covers the gap. Before the loan can go forward, you’re also required to receive counseling from a HUD-approved counselor who walks you through the costs, obligations, and alternatives.
What Borrowing Against Your Home Costs Upfront
None of these products are free. Home equity loans and cash-out refinances typically carry closing costs of 2% to 5% of the loan amount, which means $2,000 to $5,000 on a $100,000 loan. That covers the origination fee, appraisal, title search, title insurance, recording fees, and notary charges.
HELOCs sometimes open with lower upfront costs because lenders waive or reduce fees to win the business. Watch for annual fees or inactivity charges buried in the account agreement.
Cash-out refinance closing costs apply to the entire new loan balance, not just the cash portion, so the dollar figure tends to be the highest of the group. Some lenders advertise “no-closing-cost” refinances, but they usually roll the costs into the balance or bump the rate. The money comes out somewhere.
When the Interest Is Tax-Deductible
Interest on a home equity loan or HELOC is deductible on your federal return only if you used the money to buy, build, or substantially improve the home securing the loan.11Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction Borrow to pay off credit cards, fund a vacation, or cover tuition, and the interest is not deductible regardless of how the loan is structured.
When the proceeds do go toward the home, the interest falls under the acquisition debt rules. For mortgages taken out after December 15, 2017, you can deduct interest on up to $750,000 in total mortgage debt, or $375,000 if you file married separately.11Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction The cap covers your first mortgage and any home equity debt used for improvements combined. The One Big Beautiful Bill Act, signed in 2025, made the $750,000 limit permanent; it had been set to expire at the end of 2025.
The same use-of-proceeds test applies to a cash-out refinance. Remodel the kitchen with the cash and that portion of the interest is deductible. Buy a car with it and it isn’t. Keep records that show exactly where the money went.
Your Right to Cancel After Closing
Federal law gives you three business days after closing on a home equity loan, HELOC, or refinance to cancel the deal without penalty. This right of rescission covers credit transactions secured by your principal dwelling. It does not cover a purchase-money mortgage used to buy the home in the first place.12Consumer Financial Protection Bureau. 12 CFR 1026.23 – Right of Rescission To cancel, notify the lender in writing before midnight of the third business day. If you let the window close, the lender disburses the funds and your repayment obligation begins under the terms you signed.