If you own your home and have built up equity in it, you have four main ways of borrowing money against your house: a home equity loan, a home equity line of credit (HELOC), a cash-out refinance, or, for homeowners 62 and older, a reverse mortgage. Each delivers the money differently and carries its own repayment rules, interest structure, and risks. The right fit depends on how much equity you have, whether you want a single lump sum or ongoing access to funds, and how you plan to pay it back.
How Much You Can Borrow
Your equity is the gap between what your home is worth and what you still owe against it. A house valued at $400,000 with a $250,000 mortgage balance holds $150,000 in equity. That number grows as you pay down principal and as the property appreciates.
Lenders won’t let you borrow all of it. They apply a loan-to-value ratio (LTV) that caps total secured debt against the home as a percentage of its appraised value. Fannie Mae caps the LTV on a cash-out refinance of a primary residence at 80%. When a second loan sits on top of your existing mortgage, lenders look at the combined loan-to-value ratio (CLTV), which adds up every debt against the property. Fannie Mae allows a maximum CLTV of 90% for subordinate financing on a primary residence.1Fannie Mae. Eligibility Matrix
Running the earlier example at a 90% CLTV: 90% of $400,000 is $360,000. Subtract the $250,000 first mortgage, and you could potentially borrow up to $110,000 through a second lien.
What Lenders Look For
Equity alone doesn’t get you the loan. Federal regulation requires lenders to make a good-faith determination that you can repay, and that assessment must weigh your debt-to-income ratio, which compares total monthly debt obligations to monthly income.2eCFR. 12 CFR 1026.43 – Minimum Standards for Transactions Secured by a Dwelling Most lenders want to see a DTI below 43%, though some programs allow more with compensating factors.
A FICO score of 620 is a common minimum, and higher scores unlock better rates.1Fannie Mae. Eligibility Matrix Expect to produce recent pay stubs, W-2s, and tax returns. The lender will order a professional appraisal to confirm the home’s value, and you’ll need to show your property taxes and hazard insurance are current.
Home Equity Loan
A home equity loan works like a second mortgage. You receive a single lump sum at closing and repay it in fixed monthly installments over a set term, commonly five to thirty years. The rate is locked at closing, so the payment never changes. That predictability makes it a good fit for one-time expenses like a major renovation or paying off high-rate debt.
The loan creates a lien against your home, which means the lender can pursue foreclosure if you stop paying.3Consumer Financial Protection Bureau. What You Should Know About Home Equity Lines of Credit It sits behind your first mortgage, so if the home is ever sold to satisfy debts, the primary lender gets paid first.
Ask whether the loan carries a prepayment penalty. Federal law bans the penalty entirely on loans that don’t meet the “qualified mortgage” standard. Qualified mortgages can include one, but only for the first three years, and it can’t exceed 3% of the balance in year one, 2% in year two, and 1% in year three.4Office of the Law Revision Counsel. 15 USC 1639c – Minimum Standards for Residential Mortgage Loans
Home Equity Line of Credit (HELOC)
A HELOC works more like a credit card secured by your home. Instead of a lump sum, you get access to a credit line and can draw as needed. The account runs in two phases. During the draw period, often about ten years, you can borrow up to your limit and may only owe interest on what you’ve used. When that period ends, the repayment phase begins and you pay back principal and interest on a set schedule.5Consumer Financial Protection Bureau. What You Should Know About Home Equity Lines of Credit
HELOC rates are variable. The lender sets your rate by adding a margin to a benchmark index like the U.S. prime rate, and your payment moves with the index.5Consumer Financial Protection Bureau. What You Should Know About Home Equity Lines of Credit Costs can climb significantly over the life of the line.
One federal safeguard: every variable-rate credit contract secured by a dwelling must include 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 When you shop HELOCs, compare lifetime caps and not just starting rates. Two lines that open at the same rate can end up in very different places. The flexibility to reuse the credit line as you pay it down makes a HELOC useful for ongoing or unpredictable expenses.
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a new, larger loan. The new lender pays off the old mortgage, and you pocket the difference. You end up with one monthly payment under new terms, including a new rate. The appeal is strongest when current rates are lower than what you’re paying, because you can pull cash and reduce your rate in a single transaction.
There are timing rules. Fannie Mae requires at least one borrower to have been on title for at least six months before funding, and if an existing first mortgage is being paid off, it must be at least twelve months old, measured note date to note date.7Fannie Mae. Cash-Out Refinance Transactions Homes acquired through inheritance or awarded in a divorce are treated as exceptions.
Because the refinance creates a brand-new first mortgage, the lender underwrites the full loan balance, not just the cash coming out to you. Closing costs typically run 2% to 5% of the new loan amount, which can far exceed what you’d pay on a smaller home equity loan. Weigh those costs against any rate savings before deciding.
Reverse Mortgage for Homeowners 62 and Older
The Home Equity Conversion Mortgage (HECM) is a federally insured reverse mortgage available to homeowners aged 62 and older.8Office of the Law Revision Counsel. 12 USC 1715z-20 – Insurance of Home Equity Conversion Mortgages for Elderly Homeowners The lender pays you rather than the other way around. You can take the money as a lump sum, a monthly stream, a line of credit, or some combination. The loan balance grows over time as interest and fees accrue.
Repayment is deferred until the last surviving borrower dies, sells the home, or permanently moves out. Federal regulations treat the loan as due if a borrower fails to occupy the property for more than twelve consecutive months due to physical or mental illness and no other borrower lives there.9eCFR. 24 CFR Part 206 – Home Equity Conversion Mortgage Insurance You must continue paying property taxes and homeowners insurance and keep the home in reasonable condition to stay in good standing.
A HECM is defined by federal regulation as a non-recourse loan.10eCFR. 12 CFR 226.33 – Requirements for Reverse Mortgages Neither you nor your heirs can owe more than the home is worth when the loan comes due; the FHA insurance fund covers any shortfall. That protection matters because the balance keeps growing.
Before approval, the lender conducts a financial assessment of your credit, cash flow, and residual income. If it raises doubts about your ability to keep up with taxes and insurance, the lender can require a “life expectancy set-aside” out of your loan proceeds to cover those costs.9eCFR. 24 CFR Part 206 – Home Equity Conversion Mortgage Insurance You also must complete counseling with a HUD-approved counselor who reviews the costs, obligations, and alternatives before the loan can proceed.
Closing Costs to Expect
None of these options are free. Home equity loans and cash-out refinances both carry closing costs in the range of 2% to 5% of the loan amount. On a $100,000 loan, that’s $2,000 to $5,000, covering the lender’s origination fee, appraisal, title search, title insurance, recording fees, and notary charges.
HELOCs sometimes come with lower upfront costs because some lenders waive or reduce fees to attract borrowers. Watch for annual fees or inactivity charges if you don’t use the line. Read the account agreement for ongoing costs, not just opening ones.
On a cash-out refinance, closing costs apply to the full new loan balance rather than just the cash you’re taking out, so the dollar figure tends to be larger. “No-closing-cost” options exist but usually roll the fees into the balance or raise the rate. You pay eventually.
Tax Deduction on the Interest
Interest on a home equity loan or HELOC is deductible on your federal taxes only when you use the money to buy, build, or substantially improve the home securing the loan.11Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction Borrowing to pay off credit cards, take a vacation, or cover tuition doesn’t qualify no matter how the loan is structured.
When the proceeds do go toward improving 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 ($375,000 if married filing separately), and the cap covers your first mortgage plus any home equity debt used for improvements combined.11Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction The same use-of-proceeds test governs cash-out refinances: remodel the kitchen with it and the interest is deductible; buy a car with it and it isn’t. Keep records of how you spent the proceeds in case the IRS asks.
Your Right to Cancel After Closing
For home equity loans and HELOCs, federal law gives you three business days after closing to cancel the deal without penalty. This right of rescission applies to credit transactions secured by your principal dwelling. It does not apply to a purchase-money mortgage used to buy the home in the first place.12Consumer Financial Protection Bureau. 12 CFR 1026.23 – Right of Rescission If you want to cancel, you have to notify the lender in writing before midnight of the third business day. Once that window closes, the lender disburses the funds, the new lien is recorded against your property, and repayment begins under the terms you signed.