To take out home equity, you borrow against the gap between your home’s appraised value and your remaining mortgage balance, using one of three products: a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance. Each is secured by your house, each requires you to qualify on credit and income, and each typically closes about 30 days after you submit a complete application. The product you pick, the amount you can borrow, and what it costs all depend on how much equity you’ve built and what the lender’s rules allow.
How Much You Can Borrow
Lenders don’t let you tap all of your equity. They use a figure called the combined loan-to-value ratio (CLTV): your existing mortgage balance plus the new loan, divided by the home’s appraised value. Most lenders cap CLTV at 80% to 85%, keeping 15% to 20% of the home’s value as a cushion.1Fannie Mae. B2-1.2-02, Combined Loan-to-Value (CLTV) Ratios
Say your home appraises at $400,000 and you still owe $200,000. At an 80% CLTV cap, total debt against the home can reach $320,000, so you can borrow up to $120,000. At 85%, that ceiling rises to $140,000. For a conforming cash-out refinance on a single-family home backed by Fannie Mae, the loan-to-value is capped at 80%.2Fannie Mae. Eligibility Matrix
Pick the Right Product
Every option puts your home on the line as collateral. What differs is how you receive the money, how the interest rate behaves, and how you repay.
Home Equity Loan
A home equity loan is a second mortgage paid out as a single lump sum at closing. The interest rate is fixed, and you repay over a set term of five to 30 years. This fits when you know the exact amount you need, like a defined renovation or consolidating high-interest debt. Interest starts accruing on the full balance immediately, so borrowing more than you need is wasted money.
HELOC
A HELOC works like a revolving credit line secured by the house. During the draw period, which usually lasts about 10 years, you can borrow, repay, and borrow again up to your limit.3Consumer Financial Protection Bureau. What You Should Know About Home Equity Lines of Credit The rate is variable and, by federal rule, must be tied to a publicly available index such as the prime rate.4eCFR. 12 CFR 1026.40 – Requirements for Home Equity Plans When the index moves, so does your payment.
Many plans allow interest-only payments during the draw period. That keeps monthly costs low but doesn’t reduce the balance. After the draw period ends, you shift into a repayment phase of 10 to 20 years paying principal and interest, and the payment can jump sharply. Some plans require a balloon payment of the full remaining balance at the end.3Consumer Financial Protection Bureau. What You Should Know About Home Equity Lines of Credit Read the plan terms before you sign.
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a larger new one, and you take the difference in cash. Owe $200,000, refinance into $300,000, and you walk away with roughly $100,000 minus closing costs. This works well when the new rate is lower than your current rate, because you’re reducing the cost of your whole mortgage while pulling cash out. When prevailing rates are higher than your current mortgage, a cash-out refinance means paying that higher rate on your entire balance, not just the new money. In that scenario, a home equity loan or HELOC usually costs less.
What Lenders Require
Approval turns on four factors, and the thresholds vary by lender and product.
- Equity of at least 15% to 20% in the home before most lenders will consider the application.
- Credit score usually between 620 and 680 at minimum. Higher scores earn better rates; scores below the floor get denied rather than priced up.
- Debt-to-income ratio at or below 43%, counting the proposed new payment against gross monthly income. Some lenders flex higher for strong files.
- A professional appraisal to establish current market value. The lender orders it and you pay for it. Fees for single-family homes typically run $600 to $700, more for complex or multi-unit properties.
Documents to Gather
Missing paperwork is one of the most common reasons applications stall, so put the file together before you apply.
For income, expect to provide W-2s from the past two years plus pay stubs covering the last 30 days. If you’re self-employed, plan on two years of full federal tax returns including all schedules. Some lenders offer bank statement programs that accept 12 to 24 months of statements in place of returns, though these non-qualified mortgage products often carry higher rates.
For the property, you’ll need your most recent mortgage statement, proof of homeowner’s insurance, and your latest property tax bill. Lenders want to see you’re current on both the mortgage and the taxes. Nearly all lenders collect this through the Uniform Residential Loan Application (Fannie Mae Form 1003), which asks for a complete picture of your assets, debts, and employment history.5Fannie Mae. Uniform Residential Loan Application (Form 1003)
What It Costs
Closing costs typically run 2% to 5% of the loan amount. A $100,000 home equity loan might carry $2,000 to $5,000 in upfront fees. “No closing cost” products usually recover the money through a higher interest rate over the life of the loan.
The common line items include the appraisal fee, a title search (often $75 to $250 for a residential property), recording fees charged by local government to register the new lien, and origination or underwriting fees charged by the lender. Some lenders waive origination fees or cover certain costs to win your business, so compare loan estimates from two or three institutions before you commit.
From Application to Funding
Plan on about 30 days from a complete application to funds in hand. An underwriter reviews your documents and verifies the numbers; incomplete files generate requests for more paperwork, and each round trip adds time. The lender orders the appraisal during this phase. Once underwriting clears the file, you’ll get a “clear to close” notice and schedule a signing.
After you sign, federal law gives you a three-business-day right of rescission before the loan becomes final. This applies to any credit transaction secured by your primary residence, which covers home equity loans, HELOCs, and the new-money portion of a cash-out refinance.6Office of the Law Revision Counsel. 15 USC 1635 To cancel, you must notify the lender in writing by mail, telegram, or another written method; a phone call alone doesn’t count.7Consumer Financial Protection Bureau. Regulation Z 1026.23 – Right of Rescission If you don’t cancel, funds disburse once the rescission period expires, usually by wire transfer or check.
Risks to Weigh Before Signing
Your house is the collateral. Miss payments and the lender can foreclose. That’s the fundamental difference between home equity debt and unsecured borrowing.
A home equity loan or HELOC sits in second position behind your primary mortgage. In a foreclosure sale, the first mortgage gets paid first, and the second lienholder collects whatever’s left, which may be nothing if the home has lost value. If the second lienholder doesn’t recover in full, they can pursue you personally for the remaining balance through a deficiency judgment, potentially garnishing wages or placing liens on other assets.
HELOCs carry a less obvious risk: the lender can freeze or reduce your credit line. Federal rules permit this when the home’s value drops significantly or your financial situation changes in a way that makes the lender doubt your ability to repay.4eCFR. 12 CFR 1026.40 – Requirements for Home Equity Plans If you’re counting on future draws for an ongoing project, that access isn’t guaranteed.
A cash-out refinance resets your mortgage clock. Refinancing a loan you’ve been paying for 15 years into a new 30-year term can mean significantly more total interest, even if the monthly payment feels manageable. Run the full amortization before treating a cash-out refi as cheap money.
Tax Treatment of the Interest
Interest on home equity debt is deductible only if you used the money to buy, build, or substantially improve the home securing the loan. Spend it on credit card payoff, tuition, or a car and the interest is not deductible, regardless of what shows up on your Form 1098.8Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction This rule, originally enacted under the Tax Cuts and Jobs Act, has been made permanent.
Even when the funds qualify, total mortgage debt eligible for the interest deduction is capped at $750,000 ($375,000 if married filing separately) for loans taken out after December 15, 2017. Older mortgages originated before that date keep the previous $1 million limit.8Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction The $750,000 cap covers your primary mortgage and any home equity debt combined. If you already owe $700,000 on your first mortgage, only $50,000 of a home equity loan could generate deductible interest, and only if you spent it on qualifying home improvements.