When you take out equity, your mortgage situation changes in three concrete ways: the total debt secured by your home goes up, your monthly payment goes up, and depending on which product you choose, your original mortgage either disappears into a new, larger one or stays put with a second loan stacked on top of it. Here is what happens to your mortgage when you take out equity, product by product, along with the rate, insurance, tax, and cancellation rules that come with each path.
Your Total Debt Goes Up
Whichever product you use, the lien against your house grows by the amount you withdraw plus any fees rolled into the loan.
A cash-out refinance wipes out your existing mortgage and replaces it with a bigger one. The new balance equals what you still owed, plus the cash you pull out, plus any closing costs you finance. Those costs commonly run 2% to 5% of the new loan amount. Owe $200,000, withdraw $50,000, roll in $5,000 in fees, and your new mortgage is $255,000.
A home equity loan leaves your original mortgage alone. You take on a second, separate loan secured by the same property.1Consumer Financial Protection Bureau. What Is a Second Mortgage Loan or Junior-Lien Total debt against the home still rises by the full amount borrowed, but it now sits across two accounts with two lenders and two payment schedules. Closing costs on home equity loans are sometimes lower than a full refinance, and some lenders waive them entirely.
A home equity line of credit, or HELOC, also sits as a second lien. Instead of a lump sum, you get a revolving credit line you can draw against during a draw period that typically lasts up to ten years. After that, a repayment phase of up to twenty years begins, and you pay back principal and interest on whatever balance remains. The lien against your property covers the full credit limit, not just the portion you have used.
Your Monthly Payment Goes Up
More debt means a bigger monthly bill. The shape of the increase depends on the product.
A cash-out refinance resets your repayment clock. Freddie Mac offers 15-, 20-, and 30-year terms for cash-out refinances, and most borrowers pick the longest option to keep the payment manageable.2Freddie Mac Single-Family. Cash-out Refinance Spreading a larger balance over a fresh 30-year term softens the per-month hit, but you will be paying the mortgage for decades longer than you originally planned, and the bigger balance usually still pushes the payment above what you were paying before.
With a home equity loan, you get two monthly bills: your existing mortgage payment, unchanged, plus a new fixed payment on the equity loan. The combined total is always more than the mortgage alone. Falling behind on either one puts the house at risk.
HELOCs shift over time. During the draw period, many lenders require only interest payments on the borrowed balance, which keeps the initial outlay low. Once the repayment period begins, you start paying principal and interest, often on a balance that has not moved because interest-only payments did nothing to reduce it. That transition is the single most common source of HELOC payment shock.
Your Interest Rate Situation Changes
A cash-out refinance repriced your entire mortgage at whatever rate the market offers today. If you locked in a 3% rate years ago and current rates are 6% or higher, you are now paying that higher rate on the full new balance, not just on the cash you pulled out. Even a modest rate increase applied to a larger balance can double the total interest you pay over the loan’s life.
Home equity loans and HELOCs carry higher rates than first mortgages. If you default and the property is sold in foreclosure, the first mortgage gets paid first, and the second-lien holder collects only what is left.1Consumer Financial Protection Bureau. What Is a Second Mortgage Loan or Junior-Lien Lenders price second liens above first-mortgage rates to offset that risk.
Most HELOCs also carry variable rates tied to the prime rate plus a lender margin. When the Federal Reserve moves its benchmark, prime moves with it, and your HELOC payment follows. A HELOC priced at prime plus 1% could jump from 7.5% to 9% in a single year if rates spike. Fixed-rate home equity loans avoid that fluctuation, though you usually pay a slightly higher starting rate for the certainty.
PMI May Come Back on a Refinance
This one is specific to cash-out refinances. When you refinance into a larger loan, the lender reevaluates the loan-to-value ratio from scratch. Push it above 80% and you need private mortgage insurance on the new loan, even if you had eliminated PMI on the old one years ago. A home equity loan or HELOC does not change the first mortgage’s balance, so it will not trigger PMI on that original loan.
PMI typically costs $30 to $70 per month for every $100,000 borrowed.3Freddie Mac. Breaking Down Private Mortgage Insurance (PMI) On a $255,000 refinanced mortgage, that is roughly $75 to $180 per month on top of principal, interest, and escrow. PMI protects the lender, not you, and it adds nothing to your equity.
Under the Homeowners Protection Act, you can request cancellation once your loan balance drops to 80% of the home’s original value. If you do not request it, your lender must automatically terminate PMI when the balance hits 78% of the original value based on your amortization schedule, provided you are current on payments.4Office of the Law Revision Counsel. 12 US Code 4902 – Termination of Private Mortgage Insurance “Original value” here means the value at the time of the refinanced loan, not what you paid for the house years earlier. As a backstop, PMI must terminate at the midpoint of the loan’s amortization period regardless of the balance.
How Much You Can Actually Take Out
Lenders will not let you drain all the equity. Caps come from loan-to-value ratios, conforming loan limits, and seasoning rules.
For a conventional cash-out refinance on a primary residence, Fannie Mae caps the loan-to-value ratio at 80%, meaning you must keep at least 20% equity after the transaction.5Fannie Mae. Eligibility Matrix On a home appraised at $400,000, the maximum new loan is $320,000. Still owe $200,000? You could pull out up to $120,000 minus closing costs. Multi-unit and investment properties face tighter caps of 70% to 75%. FHA-insured cash-out refinances allow up to 85%, which unlocks more equity but comes with FHA mortgage insurance premiums.
There is also a ceiling on the loan size. For 2026, the conforming loan limit for a single-family home is $832,750 in most of the country, with higher limits in designated high-cost areas.6FHFA. FHFA Announces Conforming Loan Limit Values for 2026 Above that, you are in jumbo territory, where rates are typically higher and underwriting is stricter.
Most lenders require seasoning, meaning you generally must have held the current mortgage for at least six months before closing a cash-out refinance. If you bought the property out of foreclosure or a short sale, expect a twelve-month wait. A new appraisal is also part of the deal.
The Cash Is Not Taxable, But the Interest Rules Matter
The money you receive from a home equity loan, HELOC, or cash-out refinance is not taxable income. The IRS treats loan proceeds as borrowed money because you have an obligation to repay them.7Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction You will not owe income tax on the withdrawal itself, no matter how much you take or what you use it for.
The tax question that matters is whether you can deduct the interest. Through the 2025 tax year, the Tax Cuts and Jobs Act limited the mortgage interest deduction to the first $750,000 of acquisition debt ($375,000 if married filing separately) and required that home equity funds be used to buy, build, or substantially improve the home securing the loan. Interest on equity used for other purposes, such as paying off credit cards or funding a business, was not deductible.7Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
Starting in 2026, those TCJA provisions were scheduled to sunset, reverting the deduction limit to $1,000,000 of mortgage debt ($500,000 if married filing separately) and restoring a separate deduction for interest on up to $100,000 of home equity debt regardless of use. Because tax law in this area has been actively debated by Congress, check the current version of IRS Publication 936 or consult a tax professional before relying on any specific deduction limit for your filing year.
You Have Three Days 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 can cancel the entire transaction for any reason until midnight of the third business day after closing.8Office of the Law Revision Counsel. 15 US Code 1635 – Right of Rescission as to Certain Transactions Saturdays count as business days for this purpose; Sundays and federal holidays do not.
Your lender must provide two copies of a rescission notice explaining the right, identifying the transaction, and stating the date the window expires.9eCFR. 12 CFR 1026.23 – Right of Rescission Until the three days pass, no loan funds can be disbursed and no work can begin on any project the funds are meant to pay for.
If the lender fails to provide the required notice or the mandated disclosures, the clock does not start. Your right to cancel then extends for up to three years after closing, or until you sell the property, whichever comes first.8Office of the Law Revision Counsel. 15 US Code 1635 – Right of Rescission as to Certain Transactions That extended window applies even during foreclosure proceedings if the proper disclosures were never made.