Taking equity out of your home means borrowing against the share of the property you actually own, turning part of that value into cash while adding new debt secured by the house itself. Your total balance owed goes up, your monthly payments change, your tax picture shifts, and the lender gets a legal claim against the property that stays in place until the debt is paid. Depending on which product you use, the money arrives as a lump sum or a line of credit, and the repayment terms look very different.
The Three Products That Move Your Equity Into Cash
A home equity line of credit (HELOC) works like a credit card secured by your house. The lender sets a credit limit, and you draw against it as needed during a draw period of roughly ten years, often paying only interest on what you’ve borrowed. When the draw period ends, you enter a repayment phase of about 10 to 15 years covering principal and interest, and the monthly payment usually jumps.1Federal Trade Commission. Home Equity Loans and Home Equity Lines of Credit If your minimum payments during the draw period didn’t touch principal, you may face a large balloon payment at the end.2Consumer Financial Protection Bureau. Regulation Z 1026.40 – Requirements for Home Equity Plans
A home equity loan delivers a single lump sum at closing that you repay in fixed monthly installments over 5 to 30 years. Both HELOCs and home equity loans are often called second mortgages, because they sit behind your primary mortgage in repayment priority: if the house is sold or foreclosed on, the first mortgage gets paid before the second lender sees anything.1Federal Trade Commission. Home Equity Loans and Home Equity Lines of Credit
A cash-out refinance replaces your existing mortgage with a new, larger one. The new loan pays off the old balance, and you pocket the difference.3Freddie Mac Single-Family. Cash-Out Refinance You end up with one payment instead of two, but your mortgage terms reset and the payoff clock can start over. Closing costs may be rolled into the new balance, which spares you an upfront check but grows the total debt.
Homeowners aged 62 or older have a fourth option, a Home Equity Conversion Mortgage, which is a federally insured reverse mortgage where the lender pays you and the loan comes due when you sell, move out, or die.
What It Costs Just to Get the Money
Every equity product carries closing costs, typically 2 to 5 percent of the loan amount or credit line. On a $150,000 cash-out refinance, that’s roughly $3,000 to $7,500 in appraisal fees, title insurance, recording fees, and notary charges before you see any cash.
HELOCs add their own recurring costs. Depending on the lender, you may face an annual or membership fee to keep the line open, an inactivity fee if you don’t draw on it, and an early-closure fee if you cancel within the first two or three years.4Consumer Financial Protection Bureau. What Fees Can My Lender Charge if I Take Out a HELOC Application fees may apply as well. Ask for the full fee schedule in writing before you sign.
Rolling closing costs into a cash-out refinance avoids an out-of-pocket payment, but you’ll pay interest on those costs for the life of the loan.
How Your Monthly Payments Change
The shape of the new payment depends on the product. A home equity loan or HELOC adds a second bill on top of your existing mortgage. A cash-out refinance keeps you at one payment, but a bigger one.
HELOCs deserve extra attention because the payment doesn’t stay level. During the draw period the required payment can be interest-only, which feels affordable. When the repayment period starts, the payment jumps to cover both principal and interest, a shift known as payment shock. If you drew heavily against the line, the increase can be steep.5Consumer Financial Protection Bureau. What You Should Know About Home Equity Lines of Credit
Rate type matters too. HELOCs typically carry variable rates tied to the prime rate, so payments rise and fall with the market. Home equity loans more commonly come with fixed rates. Cash-out refinances offer either. As of early 2026, average rates for both HELOCs and home equity loans sit around 7 percent, with your actual rate depending on credit, loan-to-value ratio, and lender.
A cash-out refinance also resets amortization. If you had 18 years left on your old mortgage and refinance into a new 30-year loan, you’ve added 12 years of payments. Even a comfortable monthly figure can hide a much larger interest bill over the life of the longer loan.
What the IRS Does With the Money
The cash itself is not taxable. Because you’re borrowing rather than earning, and you owe the money back, the IRS does not treat loan proceeds as income.6Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
The interest is a different story. You can deduct interest on home equity debt only if you used the borrowed money to buy, build, or substantially improve the home that secures the loan. Use a HELOC to remodel your kitchen and the interest is deductible. Use the same HELOC to pay off credit cards or buy a car and it isn’t, no matter when the debt was taken on.6Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
There’s also a ceiling. For loans taken out after December 15, 2017, interest is deductible on up to $750,000 in total mortgage debt, or $375,000 if married filing separately. That cap covers the combined balance of your primary mortgage and any qualifying home equity borrowing.6Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
What Happens to Your Credit
Opening any new home equity product triggers a hard inquiry, which usually causes a small, short-term dip in your score. The new balance increases your total debt and reduces your ratio of available-to-used credit, which can pull the score down further in the near term.
HELOCs are treated inconsistently across scoring models. FICO scores are designed to exclude HELOC balances from the credit utilization calculation that drives a significant part of your score. VantageScore models may factor the HELOC balance and limit in, so a large drawn balance could weigh on your score with some lenders and be ignored by others.
On the other side, consistent on-time payments build your credit history over time. Missed payments do the reverse, and because this debt is secured by your house, the consequences reach beyond your credit report.
What Happens to Your Ownership of the Home
The most important change is legal. A lien is recorded against your property title, giving the lender a claim that must be paid off before you can sell or transfer the home free and clear. That lien stays until the balance is gone.
If you stop paying, the lender can foreclose and force a sale of the house to recover what you owe. This applies to HELOCs, home equity loans, and cash-out refinances alike. In many states, if the sale doesn’t cover the balance, the lender may seek a deficiency judgment, a court order allowing collection of the shortfall from your other assets or income.
Borrowing against equity also raises the risk of going underwater. Say you borrow $120,000 against a $400,000 home and the local market drops 15 percent. The house is now worth $340,000 while you owe $320,000 across your mortgages. Selling or refinancing becomes very hard. The risk is highest when you borrow near the maximum loan-to-value limit right before a downturn.
Even in a flat market, the arithmetic is simple: extracting equity means you own less of your home. Pulling out $120,000 transfers $120,000 of value from you to the lender. Getting it back takes either paying down the debt or waiting for the home to appreciate.
Your Three-Day Right to Cancel
Federal law gives you a safety net after closing. For most equity transactions on your primary residence, you have until midnight of the third business day after signing to cancel with no penalty, a protection called the right of rescission.7Office of the Law Revision Counsel. 15 USC 1635 – Right of Rescission as to Certain Transactions “Business day” here means every calendar day except Sundays and federal holidays, so closing near a weekend or holiday effectively lengthens the window.8Consumer Financial Protection Bureau. Regulation Z 1026.23 – Right of Rescission
Rescission covers HELOCs, home equity loans, and cash-out refinances, essentially any new loan that takes a security interest in your primary home. It does not apply to the original purchase mortgage or to a rate-and-term refinance with no cash out.7Office of the Law Revision Counsel. 15 USC 1635 – Right of Rescission as to Certain Transactions The lender will not release any funds until the window closes.