Using your home as collateral for a loan means giving a lender a lien on the property in exchange for either a lump sum or a revolving line of credit, with the amount tied to how much equity you’ve built. Because the house backs the debt, interest rates run well below what unsecured personal loans or credit cards charge. The catch is direct: miss enough payments and the lender can foreclose and sell the home to recover what it’s owed.
Home Equity Loan or HELOC
Two products dominate this kind of borrowing, and they behave differently.
A home equity loan pays out the full amount at closing as a single sum. You repay it in fixed monthly installments over a set term, typically at a locked interest rate. It fits a one-time expense with a known price, like a kitchen renovation or paying off a defined pile of medical bills.
A home equity line of credit (HELOC) works more like a credit card secured by your house. The lender sets a credit limit, and you draw against it as needed during a draw period that usually lasts five to ten years. You pay interest only on the balance you’ve actually used, and repayments free up the credit again. HELOC rates are almost always variable, so the monthly payment moves with market rates.1Consumer Financial Protection Bureau. What Is the Difference Between a Home Equity Loan and a Home Equity Line of Credit When the draw period ends, you enter a repayment period: no more borrowing, and the remaining balance has to be paid down.
How Much You Can Borrow
Start with your equity: the home’s current fair market value minus what you still owe on any existing mortgage. A house worth $400,000 with a $200,000 mortgage balance carries $200,000 in equity. You can’t borrow all of it.
Lenders apply a combined loan-to-value ratio (CLTV) that caps total debt against the property, usually between 80% and 90% of appraised value. On that $400,000 home at 80% CLTV, total mortgage debt across every lien can’t exceed $320,000. Subtract the existing $200,000 mortgage and the new loan tops out at $120,000. At 90% CLTV, the ceiling rises to $360,000 total, leaving $160,000 available. Where a specific lender lands in that range depends on your credit profile and the product.2Fannie Mae. Eligibility Matrix
Debt-to-Income Ratio
Equity gets you in the door; income keeps you there. Lenders compare your total monthly debt payments to your gross monthly income to produce a debt-to-income ratio (DTI). Earn $8,000 a month and carry $3,000 in existing obligations across mortgage, car, student loans, and credit card minimums, and your DTI is 37.5%. Most home equity lenders want the DTI to stay at or below 43% to 50% after the new payment is added in. Push past that and you get a smaller approval or a denial.
Credit Score
A credit score of at least 620 is generally the floor, though many lenders have tightened that to 680 for standard home equity loans. HELOCs tend to be more forgiving, with 620 still commonly accepted. Scores above 740 unlock the lowest available rates. Below 620, options narrow sharply and the pricing reflects it.
What Lenders Will Ask For
Applications run on a standard document set. On the income side: W-2s from the last two years, pay stubs covering at least the past 30 days, and federal tax returns for the last two years. Self-employed borrowers add business returns and profit-and-loss statements for the same period.
On the property side: your current mortgage statement showing balance and payment history, a homeowner’s insurance declarations page, and property tax records confirming taxes are current. All of it feeds into the Uniform Residential Loan Application, Fannie Mae Form 1003, which asks for a full accounting of housing costs, liquid assets, and outstanding liabilities.3Fannie Mae. Uniform Residential Loan Application (Form 1003)
Appraisal
The lender orders an independent appraisal, and the lender selects the appraiser so borrowers can’t influence the result. The appraiser inspects the interior and exterior, notes condition, upgrades, room count, and square footage, then compares the property to recent nearby sales to arrive at a fair market value. That number becomes the official basis for your maximum loan amount. A low appraisal directly cuts your borrowing power.
Appraisal fees for a standard single-family home typically run $350 to $550, more for complex or large properties. The borrower pays upfront, and the fee is nonrefundable even if the loan falls through.
Closing Costs
Closing costs on home equity loans and HELOCs generally run 2% to 5% of the loan amount, so $2,000 to $5,000 on a $100,000 loan. “No closing cost” offers usually mean the fees are built into the interest rate rather than eliminated.
- Origination fee, typically 0.5% to 1% of the loan amount, covering the lender’s processing and underwriting.
- Title search, usually $100 to $300, to check public records for other liens or ownership disputes.
- Lender’s title insurance, which protects the lender, not you, against title defects discovered after closing.4Consumer Financial Protection Bureau. What Is Lender’s Title Insurance
- Credit report fee, $30 to $120, charged per applicant on a joint application.
- Recording fee charged by the county to record the new lien, typically $25 to $300 depending on location.
- Notary fee, $125 to $500 if a mobile notary handles the signing.
Your Three-Day Right to Cancel
Signing doesn’t end the transaction. Federal law gives you a right of rescission on loans secured by your primary residence: you have until midnight of the third business day after closing to cancel for any reason, with no penalty. Business days for this purpose include Saturdays but exclude Sundays and federal public holidays.5Consumer Financial Protection Bureau. How Long Do I Have to Rescind? When Does the Right of Rescission Start
The clock starts on the latest of three events: the day you sign the loan documents, the day you receive the Truth in Lending disclosures, or the day you receive the notice explaining your right to cancel. If any of those arrives late, the three-day window restarts from that later date.6Office of the Law Revision Counsel. 15 USC 1635 – Right of Rescission as to Certain Transactions
Rescission applies to home equity loans, HELOCs, and most refinances. It does not apply to a mortgage used to purchase a home. Once the window closes, the lender disburses the funds: a wire or check for a home equity loan, or an active draw account accessible by card or checkbook for a HELOC.
Whether the Interest Is Tax-Deductible
Deductibility depends on what you spend the money on, not what kind of loan it is. Use the proceeds to buy, build, or substantially improve the home securing the loan and the interest is deductible as mortgage interest. Use the money for anything else, like paying off credit cards, funding a vacation, or covering tuition, and it is not.7Internal Revenue Service. Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses)
Even for qualifying home improvements, there’s a cap. For mortgages taken out after December 15, 2017, you can deduct interest on up to $750,000 of total acquisition debt, or $375,000 if married filing separately. That ceiling covers all mortgage debt on the property combined, primary mortgage plus any home equity borrowing. Older mortgages may qualify for a $1,000,000 cap.8Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction The One Big Beautiful Bill Act, signed July 2025, may affect these limits going forward; check IRS.gov before filing.
This trips up borrowers who consolidate credit card debt with a home equity loan expecting a tax break on the interest. There isn’t one. The deduction follows the use of the money.
What You’re Risking
The main risk is direct: you can lose the house. The lender holds a lien, and a serious default lets it start foreclosure and sell the property to recover the debt. That authority exists even if you’re fully current on your primary mortgage, because a second-lien holder has independent foreclosure rights.
Foreclosure may not end the exposure. If the sale doesn’t cover the balance, most states allow the lender to seek a deficiency judgment for the remainder. Some states limit or eliminate that option, particularly after nonjudicial foreclosures, but the protections vary widely. Where they don’t apply, the lender can pursue the shortfall through wage garnishment or bank levies. Home-secured borrowing turns what would otherwise be an unsecured problem into a threat to your housing.
HELOC borrowers carry an additional risk from the variable rate. A payment that fits your budget today can climb noticeably if rates rise during the draw or repayment period. Before signing, run the payment against a rate increase of two to three percentage points and confirm you can still cover it.