If you want to take out a loan against your house, you have three real options: a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance. All three let you convert the equity you’ve built into cash, usually up to 80% of your home’s current value minus what you still owe on your mortgage. The process looks a lot like getting your original mortgage — application, appraisal, underwriting, closing — and it typically runs two to six weeks from start to funding.
Pick the Right Product First
Which product fits depends on how you’ll use the money and what your existing mortgage looks like.
A home equity loan hands you a lump sum at a fixed (or sometimes adjustable) rate, with set monthly payments over a defined term. It sits on top of your existing mortgage as a second lien. This works when you know the exact amount you need, like a defined renovation budget or paying off a specific debt.
A HELOC is a revolving line of credit secured by your house. You get a credit limit, draw against it during the draw period as expenses come up, and the available balance replenishes as you repay. HELOCs almost always carry variable rates, so the payment moves with the market.1Consumer Financial Protection Bureau. What Is the Difference Between a Home Equity Loan and a Home Equity Line of Credit (HELOC) The flexibility pays off when costs trickle in over months and you don’t want to pay interest on money sitting idle.
A cash-out refinance replaces your current mortgage with a new, larger one, and you pocket the difference. This makes sense when current rates are meaningfully lower than your existing mortgage rate — enough that monthly savings justify the closing costs on a brand-new first mortgage. If you’re deep into your current loan and most of your payment already goes to principal, replacing it with a fresh 30-year term can cost you more over time even at a lower rate. A home equity loan layered on top is usually the better math in that case.
Whether You’ll Qualify
Credit Score
Most lenders want a FICO score of at least 680. Some will approve down to 620, but with a higher rate and tougher conditions elsewhere. Below 620, approval gets genuinely difficult with national lenders. Moving from the upper-fair range into the “good” band (670 and up) can save you thousands over the life of the loan, so check your score before applying and spend a few months cleaning it up if you’re near the border.
Debt-to-Income Ratio
Your DTI is total monthly debt payments divided by gross monthly income. Fannie Mae’s automated underwriting allows DTI up to 50%; manually underwritten loans cap at 36%, or up to 45% with strong credit and substantial cash reserves.2Fannie Mae. Debt-to-Income Ratios In practice, many lenders set their own ceiling around 43%, so don’t assume you’ll get the most generous threshold. If your car payment, student loans, and existing mortgage already eat most of your paycheck, you may need to pay something off before applying.
How Much You Can Actually Borrow
Combined loan-to-value (CLTV) measures your total mortgage debt — first mortgage plus the new loan — against the appraised value of your home. Most lenders cap CLTV at 80%, which means you keep at least 20% equity untouched. Some will stretch to 85%, with a higher rate as the tradeoff.
The math is straightforward. On a home appraised at $400,000, an 80% CLTV means total debt can’t exceed $320,000. If you owe $250,000 on your first mortgage, you can borrow up to roughly $70,000. That 20% cushion protects the lender if values drop and protects you from ending up underwater.
Documents to Gather
The paperwork load is real, and having everything in hand before you apply saves weeks. The core document is the Uniform Residential Loan Application (Fannie Mae Form 1003), which your lender provides.3Fannie Mae. Uniform Residential Loan Application (Form 1003) Beyond that, expect to produce:
- Two most recent pay stubs, W-2s from the last two years, and federal tax returns with all schedules. If you’re self-employed, add Schedule C and any partnership or S-corp returns.
- Bank statements covering the last 60 days for every checking and savings account, so the lender can confirm you have reserves for closing costs and a few months of payments.
- Recent statements for credit cards, student loans, auto loans, and other recurring debts, which feed your DTI.
- Your current homeowners insurance declarations page, latest property tax bill, and any HOA fee statements.
Rental income, dividends, and other outside income can help your application, but only if documented. Bring lease agreements, 1099s, or dividend statements. Deposits on bank statements aren’t enough on their own.
From Application to Funded
Most lenders let you apply online, though you can also work through a loan officer. Once your package is in, the lender orders a property appraisal. For a standard home equity loan, that usually means a full interior appraisal, where a licensed appraiser inspects the property and compares it to recent nearby sales. Some lenders use desktop or exterior-only appraisals on lower-risk loans; those are cheaper and faster.
An underwriter then reviews the full picture: income, debts, credit history, the appraisal, and the title search. This is where delays happen. A gap in employment, a large unexplained deposit, or a lien on the property will trigger requests for explanation or more documents. Responding quickly keeps the timeline on track.
Expect two to six weeks from application to funding. The main variables are how fast the appraisal gets scheduled, how clean your paperwork is, and the lender’s underwriting backlog. Some lenders advertise 10-day closings for strong borrowers with simple properties.
Closing, Costs, and Your Right to Cancel
Closing costs on home equity products typically run 2% to 5% of the loan amount. On a $70,000 loan, that’s $1,400 to $3,500, paid out of pocket or rolled into the balance. The main pieces are an origination fee (commonly 0.5% to 1%), the appraisal, a title search, title insurance, and government recording fees. Some lenders waive or reduce fees to compete, especially on HELOCs. Compare loan estimates from at least two or three institutions, and watch for lenders who waive fees upfront but recover them through a prepayment penalty or higher rate.
For HELOCs specifically, a lender cannot charge any nonrefundable fees until three business days after you receive the required disclosures.4eCFR. 12 CFR 1026.40 – Requirements for Home Equity Plans You have time to review the terms and walk away.
At closing, you sign the documents that create the new lien, but you don’t get the money immediately. Federal law gives you a three-business-day right of rescission, during which you can cancel for any reason and owe nothing, including finance charges.5eCFR. 12 CFR 1026.23 – Right of Rescission The clock starts when you’ve signed and received the required cancellation notice. “Business day” here means every calendar day except Sundays and federal public holidays.6eCFR. 12 CFR 1026.2 – Definitions and Rules of Construction Close on a Friday and your window runs through Monday at midnight, extended to Tuesday if Monday is a federal holiday. Once that window closes, the lender releases the funds.
What About the Tax Deduction
Interest on a home equity loan or HELOC is deductible, but only when you use the money to buy, build, or substantially improve the home that secures the loan. Paying off credit cards, funding a vacation, or covering tuition with home equity debt does not qualify, no matter what the lender’s marketing suggests.7Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
The IRS defines “substantially improve” as work that adds to the home’s value, extends its useful life, or adapts it to a new use. Repainting a room on its own doesn’t qualify. Repainting as part of a larger renovation that genuinely improves the home does.
There’s also a cap. You can deduct interest on the first $750,000 of combined mortgage debt ($375,000 if married filing separately). That limit covers your first mortgage and any home equity borrowing together, so if your existing mortgage is already near $750,000, there may be little or no room for additional deductible interest. Mortgages taken out before December 16, 2017 may qualify under the older $1 million limit.7Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
What’s Really at Stake
A loan against your house is secured by your house. If you stop making payments, the lender can foreclose, even if you’re current on your first mortgage. The home can be sold at a sheriff’s sale, and the first mortgage lender can start its own foreclosure if the resulting situation disrupts payments to it.
Lien priority is where people get caught. The first mortgage gets paid before the home equity lender in any foreclosure. If the sale doesn’t cover both debts, the home equity lender gets nothing from the property, but the debt itself doesn’t disappear. In many states, that lender can sue you personally for the remaining balance based on the promissory note you signed.
Treat this debt with the same seriousness as your primary mortgage. Before borrowing, stress-test your budget against job loss, rate increases (especially on a variable-rate HELOC), and major unexpected expenses. If the numbers only work when everything goes right, the loan is too large.