To take a loan out on your house, you borrow against the equity you’ve built using one of three products: a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance. Most lenders require you to keep at least 15% to 20% equity in the home after the new borrowing, a credit score of at least 620 to 680, a manageable debt-to-income ratio, and documentation of your income and property. From application to funding usually takes two to six weeks.
How Much Equity You Need
Equity is the gap between your home’s current market value and what you still owe on it. If your home is worth $400,000 and your mortgage balance is $250,000, you have $150,000 in equity. Lenders measure this as a loan-to-value ratio (LTV). For a second loan, they use the combined loan-to-value ratio (CLTV), which adds the existing mortgage and the new borrowing together and divides by the home’s value.
Most lenders cap CLTV at 80% to 85%, so you need to keep at least 15% to 20% equity after the new loan is added. Using the example above, if your lender caps CLTV at 80%, the most you could borrow on top of your existing $250,000 mortgage would be $70,000. That’s $400,000 × 0.80 = $320,000, minus the $250,000 you already owe.
Investment properties face stricter rules. Lenders generally limit LTV to around 75% for rental or investment homes and charge higher interest rates, often 1% to 1.5% above what you’d pay on a primary residence.
Credit Score and Income Requirements
Most lenders require a minimum FICO score between 620 and 680 for home equity products, though stricter lenders set their cutoff at 720. A higher score doesn’t just improve your odds of approval; it directly lowers the interest rate you’re offered.
Lenders also look at your debt-to-income ratio, which compares your total monthly debt payments to your gross monthly income. If you earn $7,000 a month and your existing debts (mortgage, car payment, credit cards, student loans) total $2,500, your DTI is about 36%. Most lenders prefer DTI below 43%, and some will stretch to 50% for borrowers with strong credit and significant equity.1Federal Register. Qualified Mortgage Definition Under the Truth in Lending Act (Regulation Z) General QM Loan Definition
The Three Ways to Borrow Against Your House
Each option works differently. The right one depends on whether you need a fixed amount all at once, flexible access over time, or a complete mortgage restructure.
Home Equity Loan
A home equity loan is a second mortgage that gives you a lump sum at a fixed interest rate. You repay it in equal monthly installments over a set term, commonly five to thirty years. Because the rate is locked, your payment stays the same for the life of the loan. As of early 2026, the average rate on a home equity loan was around 7.59%. The tradeoff for that predictability is that you can’t borrow more later without applying again.
Home Equity Line of Credit
A HELOC works more like a credit card secured by your house. The lender approves a maximum credit limit, and you draw against it as needed during a draw period that typically lasts ten years.2Consumer Financial Protection Bureau. Regulation Z Section 1026.40 – Requirements for Home Equity Plans During that draw period, many lenders only require interest-only payments, which keeps the monthly obligation low but means you aren’t reducing the balance.
After the draw period ends, the line closes and you enter a repayment period of 10 to 20 years during which you pay back both principal and interest. This is where people get caught off guard. If you carried a large balance and only made interest payments for a decade, the new monthly payment that includes principal can jump substantially. HELOC rates are usually variable, tied to the prime rate, and averaged about 7.51% in early 2026. Some lenders offer a fixed-rate conversion option that lets you lock a portion of your balance at a set rate during the draw period.
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage entirely with a new, larger loan. The new loan pays off the old balance, and you receive the difference in cash at closing. This resets your interest rate, repayment term, and monthly payment. It can make sense when current rates are lower than your existing mortgage rate. When rates are higher, you’re raising the rate on your entire mortgage balance just to access a relatively smaller amount of equity. Veterans with VA loan eligibility can use a VA-backed cash-out refinance, which may allow borrowing up to the full appraised value of the home.3U.S. Department of Veterans Affairs. Cash-Out Refinance Loan
If You’re 62 or Older: Reverse Mortgages
If you’re 62 or older and want to convert home equity into cash without making monthly loan payments, a Home Equity Conversion Mortgage (HECM) is a federally insured option.4Consumer Financial Protection Bureau. Reverse Mortgage Loans The lender pays you instead of the other way around, either as a lump sum, monthly payments, or a line of credit. The balance grows over time and comes due when you sell the home, move out, or pass away.
Before closing on a HECM, federal law requires you to complete a counseling session with a HUD-approved counselor who is independent from the lender.5U.S. Department of Housing and Urban Development. HECM Counseling Handbook 7610.1 A non-borrowing spouse living in the home must also participate. Interest that accrues on a reverse mortgage is generally not tax-deductible.
Documents to Gather Before You Apply
Lenders verify your income, assets, and property details before approval. Have these ready:
- Two years of W-2s for wage earners, or 1099 statements for independent contractors. Self-employed borrowers should also have two years of federal tax returns.
- Two months of complete bank statements from checking, savings, and investment accounts. Include all pages, even blank ones.
- Your current mortgage statement, showing balance, payment amount, and lender information.
- A homeowners insurance declarations page proving your coverage is current and adequate.
Most lenders use the Uniform Residential Loan Application (Fannie Mae Form 1003) to standardize the process.6Fannie Mae. Uniform Residential Loan Application (Form 1003) Many now let you fill this out and upload documents through an online portal.
What Happens After You Apply
Once the lender has your application and documents, the file goes to underwriting, where an analyst verifies everything and assesses the risk of lending to you. This is the part that takes the most time, typically two to six weeks from application to funding.
During underwriting, the lender orders a property valuation. A traditional full appraisal involves a licensed appraiser visiting your home, inspecting the interior and exterior, and comparing it against recent sales in the neighborhood. For borrowers with strong credit (generally mid-700s or higher) seeking a smaller loan relative to their home’s value, some lenders use an automated valuation model or a desktop appraisal instead. Automated valuations are now used on over 40% of home equity loan originations. Appraisal fees vary by location, but expect to pay between $525 and $1,300 for a single-family home, with a typical cost around $625.
If the appraisal supports the loan amount and underwriting clears, you move to closing. This meeting usually happens at a title company or attorney’s office, where you’ll sign the mortgage or deed of trust, the promissory note, and various disclosure documents in front of a notary.
Closing Costs and Ongoing Fees
Closing costs on a home equity loan or HELOC typically run 2% to 5% of the loan amount. On a $75,000 loan, that’s roughly $1,500 to $3,750. These costs cover the appraisal, title search, title insurance, recording fees, attorney or notary fees, and lender origination charges. Some lenders advertise “no closing costs” but fold those expenses into a higher interest rate or charge them back if you close the account within the first few years.
HELOCs often carry ongoing fees that home equity loans don’t. Annual fees of $50 to $100 are common, and some lenders charge an early closure or inactivity fee of $200 to $500 if you cancel the line within the first two to three years. Home equity loans may have prepayment penalties ranging from 2% to 5% of the remaining balance, or flat fees of $300 to $500. Ask the lender for a full fee schedule before signing.
When Home Equity Interest Is Tax-Deductible
Interest on home equity debt is deductible on your federal taxes only if you used the borrowed funds to buy, build, or substantially improve the home that secures the loan.7Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction Renovate your kitchen or add a bedroom, and the interest qualifies. Pay off credit cards, fund a vacation, or cover college tuition with the same loan, and the interest is not deductible, regardless of when the loan was taken out.
The IRS considers an improvement “substantial” if it adds value to the home, extends its useful life, or adapts it to a new use. A new roof, a finished basement, and an HVAC replacement all count. Routine maintenance like patching a leak or repainting a wall generally does not, unless it’s part of a larger qualifying renovation.
There’s a cap on the total mortgage debt that qualifies for the deduction. The Tax Cuts and Jobs Act of 2017 lowered this limit from $1 million to $750,000, and the One Big Beautiful Bill Act of 2025 made the $750,000 cap permanent. That limit covers the combined balance of your primary mortgage and any home equity debt. If your first mortgage is already $700,000, only $50,000 of home equity borrowing falls within the deductible window. Keep clear records of how you spend the loan proceeds in case the IRS asks.
Your Three-Day Right to Cancel
Federal law gives you a cooling-off period after closing on a home equity loan, HELOC, or cash-out refinance secured by your primary residence. You have until midnight of the third business day after signing to cancel for any reason, with no penalty.8Office of the Law Revision Counsel. 15 USC 1635 – Right of Rescission as to Certain Transactions The lender must give you written notice of this right and the forms to exercise it.
This is why funds aren’t disbursed at closing. The lender waits until the three-day window expires before releasing money. If you cancel within that window, the lender must return any fees you paid and release its security interest in your home within 20 days.
Two limits apply. The right does not cover purchase-money mortgages (the loan you used to buy the home), and it does not cover a refinance that simply restructures an existing loan with the same lender without advancing additional funds.9eCFR. 12 CFR 1026.15 – Right of Rescission If the lender fails to deliver the required disclosures at closing, your right to cancel can extend up to three years.
What Happens If You Can’t Pay
Because the loan is secured by your house, falling behind puts your home at risk. That’s the fundamental tradeoff of borrowing against your property: you get lower interest rates than unsecured debt, but the lender holds a lien with the legal right to foreclose if you default.
With a home equity loan or HELOC that sits behind a first mortgage, the second lender is in a junior lien position. If the first mortgage lender forecloses, sale proceeds pay off the first mortgage before the second. If the sale price doesn’t cover both loans, the second lender gets nothing from the property, but the debt isn’t erased. The second lender can still sue you personally for the remaining balance under the promissory note, and if they win a court judgment, they may be able to garnish wages or levy bank accounts. State law governs whether and how lenders can pursue these deficiency judgments, so the risk varies by where you live.
In practice, lenders usually try to work out a repayment plan, loan modification, or forbearance arrangement before starting foreclosure. If you’re struggling with payments, contact your lender early. Waiting until you’re months behind narrows your options considerably.