How to Borrow From Your Home Equity: Products, Limits, and Costs

To borrow from your home equity, you pledge your house as collateral and take either a lump-sum home equity loan, a revolving home equity line of credit (HELOC), or a cash-out refinance that replaces your existing mortgage with a larger one. Most lenders will let your total property debt reach 80% to 85% of the home’s appraised value, and approval turns on your credit, income, and the property itself.¹ Expect two to six weeks from application to funding, plus closing costs that often run 3% to 6% of the loan.

The Three Products to Choose From

A home equity loan acts as a second mortgage. You get one lump sum at closing and repay it in fixed monthly installments, typically over five to thirty years, at a fixed rate.¹ The payment never changes. This fits borrowers who know the exact amount they need upfront.

A HELOC works like a credit card secured by your house. You get a credit limit and draw against it during a draw period that usually lasts ten years, paying only interest on the balance you’ve used.¹ When the draw period ends, the balance converts to a fully amortizing repayment schedule that can run up to twenty more years, and the payment can jump sharply because principal is now included. Rates are usually variable, tied to the prime rate (6.75% as of early 2026), so payments can shift month to month even during the draw phase.

A cash-out refinance replaces your whole mortgage with a new, larger one and pays you the difference in cash. One payment, one rate. The tradeoff is that you pay interest on the entire new balance, not just the cash you took out. This option works best when current rates are near or below your existing mortgage rate. When rates are meaningfully higher than what you’re already paying, keeping your original mortgage and stacking a home equity loan on top usually costs less over time.

How Much You Can Borrow

Lenders cap total property debt using the combined loan-to-value ratio, or CLTV: your existing mortgage plus the new borrowing, divided by the home’s appraised value. Most lenders set that ceiling between 80% and 85%, and a few go to 90%.¹

The arithmetic is simple. Multiply the appraised value by the lender’s maximum CLTV, then subtract your current mortgage balance. On a $400,000 home at 85% CLTV, total allowable debt is $340,000. Owe $200,000 on the first mortgage, and you could borrow up to $140,000 more. The lender may approve less based on your income, credit, and other obligations.

For cash-out refinances, Fannie Mae caps the loan-to-value ratio at 80% on a single-unit primary residence.² That applies to the new single loan, not a combined figure. On the same $400,000 home, the new mortgage tops out at $320,000. After paying off the $200,000 existing loan, you’d walk away with $120,000 in cash before closing costs.

What Lenders Require to Approve You

Credit Score

Minimum scores generally fall between 620 and 680. A 620 can clear the bar at some lenders, many want 660 or higher, and scores above 720 earn noticeably better rates. If you’re borderline, shop widely; thresholds vary.

Debt-to-Income Ratio

Your debt-to-income ratio compares all monthly debt payments (including the proposed new one) to your gross monthly income. Federal rules require lenders to verify your ability to repay any loan secured by your home.³ There is no single federal DTI cap, but most lenders prefer 43% or less and will stretch to 50% for borrowers with strong credit and substantial equity.

Income and Employment

Lenders want a stable two-year work history with steady or rising income. Self-employed borrowers typically need two full years of the relevant income type before a lender will count it. Employment gaps don’t automatically disqualify you, but they require explanation and documentation.

Property Insurance

Because the house secures the loan, you have to carry homeowners insurance with coverage at least equal to the lesser of the structure’s full replacement cost or the unpaid loan balance (as long as that balance is at least 80% of replacement cost).⁴ The policy must pay on a replacement cost basis, not actual cash value, and deductibles usually cannot exceed 5% of the coverage amount. Flood insurance applies if the home sits in a flood zone. The lender is named on the policy so it gets paid directly if the home is destroyed.

Closing Costs and Fees

Home equity loans and HELOCs typically carry closing costs of 3% to 6% of the loan amount. On a $100,000 loan, that’s $3,000 to $6,000. Borrowers who focus only on the rate often miss this. Common charges include:

Appraisal fee: $350 to $550 for a standard single-family home.
Origination fee: 0.5% to 1% of the loan amount.
Title search and title insurance: $100 to $300 for the search, plus 0.1% to 1% of the loan for insurance.
Attorney or document preparation fees: $200 to $500.
Recording fees: usually under $100, varies by county.
Credit report fee: $30 to $120.

Some lenders advertise “no closing cost” HELOCs. Usually that means the costs sit inside a slightly higher rate, or they’re waived on condition that you keep the line open for a minimum number of years. Close early and you may owe a termination fee that recovers those waived costs. Read the terms before assuming you’re ahead.

Cash-out refinances run 2% to 5% of the full new loan amount, because you’re refinancing the entire mortgage, not just the cash portion.

Documents to Gather Before Applying

Having these ready keeps the file moving:

Income verification: your most recent 30 days of pay stubs and W-2s from the past two years. Self-employed borrowers need full federal tax returns for the same two years.
Identification: government-issued photo ID and Social Security numbers for everyone on title.
Mortgage statement: current statement showing balance, payment, and account number.
Property information: homeowners insurance declarations page and most recent property tax bill.
Asset documentation: recent bank and investment statements showing reserves.

You’ll also complete the lender’s loan application covering employment history, debts, assets, and the amount you want to borrow.⁵ Most lenders let you file it online.

The Approval and Closing Timeline

Once your application is in, the lender orders an appraisal. An appraiser visits, evaluates condition, pulls comparable sales, and delivers a value. That number drives your CLTV, so it controls how much you can borrow. If it comes in low, your limit shrinks and you may need to scale down your request.

In underwriting, a specialist checks income, pulls credit, confirms the appraisal, and verifies everything fits the lender’s standards. From application to closing usually takes two to six weeks. Online lenders can move faster if you respond quickly to document requests. Self-employment, multiple properties, or title issues add time.

If approved, you attend a closing and sign the loan agreement and lien documents. Federal law then gives you three business days to cancel the transaction for any reason, and the lender cannot release funds until that window closes.⁶ The same three-business-day right applies when a HELOC account is opened.⁷ After rescission expires, the lender wires or deposits the money.

When the Interest Is Tax-Deductible

Interest on home equity debt is deductible only if you used the money to buy, build, or substantially improve the home that secures the loan.⁸ A kitchen renovation qualifies. Paying off credit cards or funding a vacation does not. The IRS defines a substantial improvement as one that adds value, extends useful life, or adapts the home to a new use. Routine maintenance like repainting doesn’t count on its own, though paint folded into a larger project can be.

Even qualifying interest has a cap. For loans taken out after December 15, 2017, you can deduct interest on up to $750,000 of total home acquisition debt ($375,000 if married filing separately), counting your first mortgage and any equity borrowing together.⁸ If your mortgage balance is $600,000 and you add a $200,000 equity loan for renovations, only $150,000 of the equity loan falls under the cap; interest on the remaining $50,000 isn’t deductible.

Risks Worth Weighing Before You Sign

Your home is collateral. Miss payments and the lender can foreclose. That is exactly why these loans carry lower rates than unsecured borrowing: you’ve pledged the house.

HELOCs carry a specific risk that’s easy to underestimate. During the draw period, you pay only interest. When repayment starts, you pay principal and interest on the full balance over the remaining term, and the monthly payment can double or more. Budget for the transition, not just the draw-period payment.

Variable rates move with the market. A HELOC that feels affordable at 6.75% prime could strain your budget if rates climb. Before committing, test your budget at a rate two or three points higher than today’s.

Borrowing against equity also shrinks your cushion if home values fall. Owe more than the home is worth and selling becomes very hard, with refinancing options gone. Using equity for improvements that add value tends to make more sense than using it for consumption.

1
Federal Trade Commission. Home Equity Loans and Home Equity Lines of Credit
2
Fannie Mae. Eligibility Matrix
3
Consumer Financial Protection Bureau. Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z)
4
Fannie Mae. Property Insurance Requirements for One-to Four-Unit Properties
5
Fannie Mae. Uniform Residential Loan Application (Form 1003)
6
Consumer Financial Protection Bureau. 12 CFR 1026.23 – Right of Rescission
7
Consumer Financial Protection Bureau. 12 CFR 1026.15 – Right of Rescission
8
Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction