If you want to pull cash out of the equity in your home, you have four ways to do it: a home equity line of credit (HELOC), a home equity loan, a cash-out refinance, or — if you’re 62 or older — a reverse mortgage. Each turns part of your home’s value into usable money, but they differ in how the cash arrives, what rate you pay, and how you pay it back.
How Much You Can Actually Borrow
Lenders won’t let you drain your equity to zero. Most require you to keep 15 to 20 percent equity in the property after the new borrowing, so total debt against the home generally cannot exceed 80 to 85 percent of its appraised value. That cushion protects the lender if prices fall.
A quick estimate: multiply your home’s current value by 0.80, then subtract what you still owe on your first mortgage. A $400,000 home allows up to $320,000 in total mortgage debt. If your existing balance is $200,000, you could potentially borrow up to $120,000 through a second lien or a refinance.
Equity is only part of the picture. Lenders also check your debt-to-income ratio — your monthly debt payments divided by your gross monthly income. Forty-three percent is the standard ceiling, and some lenders set their limit lower. Credit score matters too. Most lenders require at least 620 for a home equity product, and scores above 740 tend to unlock the best rates.
Home Equity Line of Credit
A HELOC works like a credit card secured by your home. The lender approves a maximum credit limit, and you draw against it as needed during a “draw period” that commonly runs three to ten years. You pay interest only on what you actually borrow, not the full limit. Most HELOCs carry a variable rate tied to a benchmark index plus a margin the lender sets.
Many lenders let you make interest-only payments during the draw period, which keeps monthly costs low while you still have access to the funds. When the draw period ends, the line closes to new borrowing and a repayment period of 10 to 20 years begins, during which you pay back principal and interest.1Consumer Financial Protection Bureau. What You Should Know About Home Equity Lines of Credit Some HELOCs require a balloon payment — the whole remaining balance at once — at the end of the term, so read your agreement.
Because the rate is variable, your payment can rise or fall. Lenders set caps that limit how much the rate can move in a single adjustment and over the life of the loan, and they must disclose that cap structure before you sign so you can see the worst-case rate.2Federal Trade Commission. Home Equity Loans and Home Equity Lines of Credit Some HELOCs offer a conversion feature that lets you lock a portion of the balance at a fixed rate, usually for a conversion fee.
Home Equity Loan
A home equity loan gives you a single lump sum at closing with a fixed interest rate and fixed monthly payments over a set term, commonly five to thirty years. The payment doesn’t change, which makes budgeting simpler than with a variable HELOC.
This is a second mortgage, sitting behind your primary mortgage in priority. If you default, the lender can foreclose to recover what you owe.2Federal Trade Commission. Home Equity Loans and Home Equity Lines of Credit Because the lender’s position is secondary, rates tend to run somewhat higher than on a primary mortgage.
A home equity loan fits when you need a specific dollar amount all at once — a major renovation, for example — and want predictable payments. A HELOC is generally better when you need flexibility to draw funds at different times.
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a new, larger one. The new lender pays off your current balance, and you pocket the difference. You end up with one monthly payment at a new rate covering the full loan.
This usually makes sense when current rates are lower than the rate on your existing mortgage, because you reduce your rate and access cash in one move. If rates have risen since you took out your original loan, a cash-out refinance means paying that higher rate on your entire balance, not just the cash you withdrew. Fannie Mae requires your existing first mortgage to be at least 12 months old before you can do a cash-out refinance on a conforming loan.3Fannie Mae. B2-1.3-03, Cash-Out Refinance Transactions
A refinance also resets your amortization clock. If you were 10 years into a 30-year mortgage and refinance into a new 30-year loan, you’ve added years of interest even at a lower rate. Run the total cost comparison, not just the payment.
Reverse Mortgage if You’re 62 or Older
If you’re at least 62, a reverse mortgage lets you convert equity into cash without making monthly payments. The most common type is a Home Equity Conversion Mortgage, insured by the federal government.4Consumer Financial Protection Bureau. Reverse Mortgage Loans You can take the funds as a lump sum, a line of credit, or monthly payments. The balance grows over time because interest accrues, and repayment isn’t due until you sell, move out, or pass away.
How much you can borrow depends on your age, current rates, and your home’s appraised value. Borrowers must complete counseling with a HUD-approved agency before closing. You remain responsible for property taxes, homeowners insurance, and maintenance. Falling behind on any of those can trigger default.
Under 62? A reverse mortgage isn’t an option — one of the other three routes is the path.
Costs You’ll Pay to Access the Money
Tapping equity is not free. Closing costs on a home equity loan or HELOC generally run 2 to 5 percent of the loan amount. On $100,000, that’s $2,000 to $5,000 upfront. Typical line items include an origination fee, an appraisal fee, a title search, and recording fees. A cash-out refinance carries similar costs, sometimes higher because you’re refinancing the entire mortgage rather than adding a smaller second lien.
HELOCs can also carry ongoing fees: an annual membership fee, an inactivity fee if you don’t draw on the line, or a cancellation fee if you close the account within the first two or three years.5Consumer Financial Protection Bureau. What Fees Can My Lender Charge if I Take Out a HELOC Some lenders charge a conversion fee if you lock part of your balance at a fixed rate. Ask for a full fee schedule before you apply.
The Risks Before You Sign
The biggest risk is foreclosure. Every method above uses your home as collateral. Miss the payments and the lender can take the property.2Federal Trade Commission. Home Equity Loans and Home Equity Lines of Credit That’s a different order of risk from a credit card or personal loan.
Falling home values create a second danger. If prices drop significantly after you borrow, you can end up owing more than the home is worth — underwater — which makes it hard to sell or refinance without bringing cash to closing. With a HELOC, the lender can freeze or reduce your credit line if the home’s value drops substantially below the original appraisal.2Federal Trade Commission. Home Equity Loans and Home Equity Lines of Credit
Variable rates add another layer. If rates climb, your HELOC payment climbs with them. Before you borrow, calculate the payment at the maximum rate your cap structure allows, not just at today’s rate.
What the Application Looks Like
You start by submitting an application and financial documents to a lender: recent tax returns, W-2s or 1099s, pay stubs, current mortgage statements, property tax records, and proof of homeowners insurance. The lender pulls your credit and orders an appraisal. A licensed appraiser inspects the home, measures it, and compares it with recent sales of similar nearby properties to set its current market value.6eCFR. 12 CFR 323.3 – Appraisals Required; Transactions Requiring a State Certified or Licensed Appraiser The appraised value caps how much you can borrow, so a lower-than-expected number cuts into your cash.
Once underwriting clears, you close by signing the promissory note, the deed of trust or mortgage, and the closing disclosure that itemizes final terms and costs.7Consumer Financial Protection Bureau. Mortgage Closing Checklist Read every page. If any term differs from what you were promised, negotiate or walk. Expect the full process to run 30 to 45 days, longer if documents are missing or the appraisal comes in low.
Your Three-Day Right to Cancel
Federal law gives you three business days after closing to cancel a home equity loan or HELOC secured by your primary residence. It’s called the right of rescission.8eCFR. 12 CFR 1026.23 – Right of Rescission During that window, you can cancel for any reason and owe nothing — no finance charges, no fees. The countdown starts after you sign and receive the required disclosures, whichever happens last. Business days include Saturdays but exclude Sundays and federal holidays.2Federal Trade Commission. Home Equity Loans and Home Equity Lines of Credit
To cancel, notify the lender in writing. A phone call doesn’t count.2Federal Trade Commission. Home Equity Loans and Home Equity Lines of Credit Because of the waiting period, funds aren’t released until the fourth business day after closing.
The rules shift with a cash-out refinance. Refinancing with your current lender without taking any additional cash gets no rescission right. Refinancing with the same lender and taking cash out gives you the rescission right only on the cash-out portion — the amount above your old balance and refinancing costs.8eCFR. 12 CFR 1026.23 – Right of Rescission Refinancing with a different lender gives you the full right on the whole transaction. The right does not apply to loans on second homes or investment properties.