Using your home equity
Equity is the part of your home you own outright. Here is how to borrow against it, what each option costs, and how to protect your home while you do.
See my equity optionsThe short answer
Home equity is your home's market value minus what you owe on it. Most lenders let you borrow until your total mortgage debt reaches about 80% to 90% of the home's value. A HELOC is a variable-rate credit line you draw from as needed; a home equity loan is a fixed-rate lump sum; a cash-out refinance replaces your whole first mortgage. If your current rate is well below today's rates, a HELOC or home equity loan usually keeps that low rate intact.
What home equity is
Equity = current home value - all mortgage balances. If your home is worth $500,000 and you owe $280,000, you have $220,000 in equity. Equity grows as you pay down your loan and as your home's value rises.
How much you can borrow
Lenders look at your combined loan-to-value (CLTV): all loans on the home divided by its value. With an 85% CLTV limit on that $500,000 home, total debt could reach $425,000. Subtract the $280,000 you owe and you could borrow up to about $145,000.
Your three options compared
| HELOC | Home equity loan | Cash-out refinance | |
|---|---|---|---|
| How you get money | Credit line; draw as needed | One lump sum | One lump sum |
| Rate type | Usually variable | Fixed | Fixed or adjustable |
| Your first mortgage | Stays the same | Stays the same | Replaced with a new, larger loan |
| Closing costs | Low, sometimes waived | Low to moderate | Typically 2% to 5% of the new loan |
| Best when | Costs are spread out over time, like a renovation | You need a known amount and a fixed payment | Today's rate is at or below your current rate |
How a HELOC works
A HELOC has two phases. During the draw period, often 10 years, you borrow as needed and may be allowed to pay interest only. During the repayment period, often 20 years, you can no longer draw and you repay principal and interest, which can raise your payment sharply. The rate is usually the prime rate plus a margin, so it moves when the Federal Reserve changes rates. After the Fed raised its target range to 3.75% to 4.00% in September 2026, HELOC rates tied to prime rose too. What the Fed hike means for borrowers.
How a home equity loan works
A home equity loan pays you a lump sum at closing. You repay it in equal monthly payments at a fixed rate over a set term, commonly 5 to 30 years. It works like a second mortgage with predictable payments. HELOC vs. home equity loan in detail.
Smart and risky uses
Common uses that can make sense: renovations that add value or fix real problems, paying off credit cards at much higher rates (if you stop running up new balances), and education or medical costs with a clear repayment plan. Risky uses: vacations, cars, investing, or anything you cannot repay from your regular income. Turning unsecured debt into debt secured by your home raises the stakes if money gets tight.
Taxes
Under current federal rules, interest on a HELOC or home equity loan is generally deductible only when the money is used to buy, build, or substantially improve the home that secures the loan, and only if you itemize, within overall mortgage debt limits. Using it for other purposes generally is not deductible. Check with a tax professional for your situation.
How to qualify
- Enough equity to stay within the lender's CLTV limit, often 80% to 90%.
- A credit score many lenders set around 680 or higher.
- A debt-to-income ratio typically at or below 43% to 50%, including the new payment.
- Proof of income and a home valuation, which may be a full appraisal or an automated estimate.
Common questions
How much equity do I need for a HELOC?
Most lenders want you to keep at least 10% to 20% equity after the new line, meaning total mortgage debt of no more than 80% to 90% of the home's value. Some lenders go higher with strong credit.
Is a HELOC rate fixed or variable?
Usually variable, tied to the prime rate plus a margin. Some lenders let you lock part of your balance at a fixed rate.
Can I lose my house with a HELOC?
Yes. A HELOC or home equity loan is secured by your home. If you cannot repay, the lender can foreclose, so borrow only what you have a clear plan to repay.
What credit score do I need for a home equity loan?
Many lenders look for 680 or higher, and the best rates often go to 740 and above. Some lenders accept lower scores with more equity.
Ready to see real numbers?
Tell us what you are trying to do and a licensed loan officer can walk you through your options. No cost to ask.