You can borrow money against your house if you’ve built up equity and can meet a lender’s credit and income standards. Most lenders let you tap up to 80% of your home’s appraised value minus what you still owe on the mortgage. The three standard routes are a home equity loan, a home equity line of credit (HELOC), and a cash-out refinance. Which one fits depends on whether you want a lump sum, flexible access over time, or a single replacement mortgage.
How Much You Can Actually Borrow
Your equity is the gap between what your home is worth and what you still owe. A home appraised at $500,000 with a $250,000 mortgage balance holds $250,000 in equity. Lenders won’t let you pull all of it. They use a loan-to-value (LTV) ratio to cap total debt against the property, and most hold that line at 80%. On that same $500,000 home, total debt can’t exceed $400,000, so after subtracting the $250,000 you still owe, you could borrow up to $150,000.
The 20% cushion protects the lender if values drop. Some lenders stretch to 85% or 90% LTV for strong-credit borrowers, but they usually charge a higher rate or require private mortgage insurance.
When a second loan sits alongside your first mortgage, lenders look at the combined loan-to-value (CLTV) ratio: every loan secured by the property, divided by the appraised value. Fannie Mae caps CLTV at 80% for a cash-out refinance on a single-unit primary residence, while purchase and limited cash-out transactions can go as high as 97% for borrowers who qualify through automated underwriting.1Fannie Mae. Eligibility Matrix If you already carry a large first mortgage, your room for a second loan shrinks fast.
Online valuation tools give a rough starting point. The number that actually controls your loan is the one the lender’s appraiser produces during underwriting.
The Three Main Ways to Borrow
Home Equity Loan
A home equity loan works like a traditional second mortgage. You get a 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 doesn’t move. That predictability fits a one-time expense with a known price tag, like a defined renovation.
You start paying interest on the full balance right away, even on money you haven’t spent. And because it’s a second lien, missing payments carries the same foreclosure risk as missing the primary mortgage.
Home Equity Line of Credit (HELOC)
A HELOC is a revolving credit line secured by your home. During the draw period, typically ten years, you borrow what you need and pay interest only on what you’ve used. Then you enter a repayment phase, usually fifteen to twenty years, paying principal and interest on whatever balance remains.
Most HELOCs carry variable rates tied to the prime rate, so payments can move. Some lenders offer a fixed-rate conversion on a portion of your balance, which is worth asking about. HELOCs can also carry annual maintenance fees and inactivity fees if you don’t draw on the line.
One risk catches borrowers off guard: your lender can freeze or reduce your credit line if your home’s value drops significantly. Federal regulations allow this when the decline wipes out a substantial portion of the equity cushion that existed when the line was opened.2Philadelphia Fed Consumer Compliance Outlook. HELOC Plans: Compliance and Fair Lending Risks When Property Values Change A lender can also suspend the line if you default on a material obligation or if it reasonably believes you can no longer make repayments.
Cash-Out Refinance
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. You end up with one monthly payment instead of two.
This option works best when you can lock in a lower rate than your current mortgage carries. When current rates are higher than your existing mortgage, a cash-out refi means paying more interest on your entire loan balance for the next 15 or 30 years, not just on the cash you took out. That math gets expensive quickly.
Home Equity Sharing Agreements
A newer alternative is a home equity investment (HEI), sometimes called a home equity sharing agreement. Instead of a loan, an investment company gives you cash in exchange for a share of your home’s future value. No monthly payments, no interest rate. You repay the full amount plus the investor’s share of appreciation in a single lump sum at the end of an agreed-upon term (typically ten to thirty years) or when you sell.
These appeal to homeowners who can’t qualify for traditional financing or want to avoid new monthly obligations. If your home appreciates sharply, the investor’s share of that gain can exceed what you would have paid in interest on a conventional home equity loan. The contracts also carry complex terms around maintenance obligations, appraisal disputes, and early buyout rights that deserve careful reading.
What Lenders Require
Lenders focus on four things: credit score, debt-to-income ratio, equity, and income stability. Falling short on one factor doesn’t disqualify you, but it will mean a higher rate or a tighter loan amount.
On credit, most lenders want a score of at least 660 to 680 for a home equity loan or HELOC. Some will go lower if you have substantial equity or a small loan amount, but expect a noticeably higher rate. Scores above 740 unlock the best pricing.
On debt-to-income, most lenders cap DTI at 43%, which is also the qualified mortgage threshold under federal rules.3Navy Federal Credit Union. Debt-to-Income Ratio (DTI): Why It’s Important and How to Calculate It If your mortgage, car loan, student loans, and minimum credit card payments already eat 35% of your gross income, the math for adding more gets tight.
On reserves, Fannie Mae requires no minimum for a standard one-unit primary residence transaction, but borrowers with a DTI above 45% on a cash-out refinance need six months of reserves. Individual lenders can set higher thresholds.4Fannie Mae. Minimum Reserve Requirements
On employment, plan on documenting at least two years of consistent income. Fannie Mae’s standards call for W-2s covering the most recent one- or two-year period depending on the income type.5Fannie Mae. Standards for Employment and Income Documentation Self-employed borrowers typically provide two years of full federal tax returns. Employment gaps or recent income swings draw extra scrutiny.
Can You Deduct the Interest
Whether the interest is deductible depends entirely on how you use the money. Under current IRS rules, interest on a home equity loan or HELOC is deductible only if you use the funds to buy, build, or substantially improve the home that secures the loan.6Internal Revenue Service. Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses) 2 A $100,000 HELOC used to remodel the kitchen qualifies. The same HELOC used to pay off credit cards or fund a vacation does not.
The IRS treats a “substantial improvement” as one that adds to the home’s value, extends its useful life, or adapts it to new uses. Routine maintenance like repainting doesn’t count on its own, though it can be included when done as part of a larger qualifying renovation.7Internal Revenue Service. Home Mortgage Interest Deduction You also have to itemize to claim it, and with the standard deduction where it is, itemizing often doesn’t pay unless your total deductible expenses are large.
Costs, Closing, and Your Three-Day Window
After you apply, the lender orders an appraisal to confirm the home’s value and the equity available. Appraisal fees for single-family homes typically run $200 to $600, with complex or multi-unit properties costing more. Underwriting review can take a few days to several weeks depending on how clean the file is.
Total closing costs on a home equity product generally run 2% to 5% of the loan amount. Beyond the appraisal, expect charges for title search and title insurance, recording fees for the new lien, origination fees, and in some states attorney fees. “No closing cost” offers usually bake those costs into a higher rate or add them to the balance.
At closing you sign the loan documents setting out your rate, payment schedule, and fees. Federal law then gives you three business days to cancel. This right of rescission under the Truth in Lending Act applies to most home equity transactions secured by your principal residence, and you can cancel in writing for any reason within that window.8Office of the Law Revision Counsel. 15 USC 1635 – Right of Rescission as to Certain Transactions Once the three days pass, the lender releases funds, usually by wire or check within a few business days.
Risks Worth Taking Seriously
Your house is the collateral. Every product described here is secured by the home, and that includes second-lien loans and HELOCs. Fall far enough behind and the lender can foreclose. The process typically begins after about 120 days of consecutive missed payments, moving from written notices to an acceleration demand to a formal notice of default filed with the county.
Second-lien foreclosures carry an extra wrinkle. Because the primary mortgage lender gets paid first from any sale proceeds, the home equity lender may recover less than you owe. If the sale doesn’t cover both debts, the home equity lender may be able to pursue a deficiency judgment for the shortfall, which can lead to wage garnishment. Deficiency rules vary significantly by state.
Variable-rate HELOCs add interest rate risk. A payment that feels manageable at 7% can hurt at 10% if the prime rate climbs during repayment. Before signing, run the number at two or three points higher. If that payment makes you uncomfortable, a fixed-rate home equity loan may be the safer path.
Finally, using home equity to pay off unsecured debt like credit cards converts that debt from unsecured, where the worst outcome is a lawsuit or collection calls, to secured, where the worst outcome is losing the house. That trade makes sense only if the spending patterns behind the original debt have genuinely changed.
Borrowing Against a Second Home or Rental
You can borrow against a property that isn’t your primary residence, but the terms tighten across the board. Lenders typically want a credit score of 700 or higher, cap LTV around 75%, and may require six to fifteen months of cash reserves to cover payments if the property sits empty. Fannie Mae caps CLTV at 75% for a cash-out refinance on a single-unit investment property and 70% on two-to-four-unit properties.1Fannie Mae. Eligibility Matrix
Rental income history matters too. Steady cash flow and high occupancy help; long vacancies or frequent turnover raise flags. Rates on investment property equity loans tend to run a quarter to a half percentage point higher than rates on the same product for a primary residence, reflecting the view that borrowers under stress are more likely to walk away from a rental than from the roof over their heads.