Quick answer
Home equity is your home’s value minus what you owe on it. You can borrow against it with a HELOC (a variable-rate credit line, usually prime — now 7% — plus a margin, often interest-only for the first years), a home equity loan (a fixed-rate lump sum) or a cash-out refinance (a new, larger first mortgage at today’s rate, averaging 7.24% for a 30-year loan). Lenders usually cap all loans on the home at a share of its value, and every option puts the home at risk if you can’t pay.
Key facts
What home equity is
Equity is the part of your home’s value that isn’t owed to a lender. It grows as you pay down principal and as the home gains value, and it shrinks if prices fall or you borrow against it. A home worth $360,000 with $200,000 left on the mortgage has $160,000 of equity — about 44% of its value — and a loan-to-value ratio of 55.6%.
Lenders don’t let you borrow all of it. They cap the combined loan-to-value (CLTV) — every loan secured by the home, divided by its appraised value. Each lender sets its own cap for home equity loans and lines; conventional and FHA cash-out refinances stop at 80%, and in Texas the state constitution limits home equity borrowing on a homestead to 80%.
| Lender’s CLTV limit | Total that can be owed | Available to borrow |
|---|---|---|
| 75% (example) | $270,000 | $70,000 |
| 80% (example) | $288,000 | $88,000 |
| 85% (example) | $306,000 | $106,000 |
| 90% (example) | $324,000 | $124,000 |
The limits are examples, not offers; your credit, income and the appraisal decide the real figure. How much equity can you borrow? works through the math in more detail.
Three ways to borrow against your home
| HELOC | Home equity loan | Cash-out refinance | |
|---|---|---|---|
| What you get | A credit line you draw on as needed | A lump sum at closing | A new, larger first mortgage; you receive the difference |
| Rate | Usually variable: index (often prime) + margin | Usually fixed | Fixed or adjustable, at today’s mortgage rates |
| Payments | Often interest-only during the draw period, then principal and interest | Equal monthly payments | One new mortgage payment |
| Your first mortgage | Stays as it is | Stays as it is | Paid off and replaced |
| Closing costs | Often lower; some lenders charge annual or early-closure fees | Similar to a small mortgage | Similar to a purchase loan: 3%–6% of the loan, per Freddie Mac |
| Best for | Ongoing or uncertain costs, such as a renovation in stages | A single known expense with a fixed budget | Large sums when today’s rate is close to, or below, your current rate |
Each has its own guide: HELOCs, home equity loans and cash-out refinance vs HELOC. Homeowners aged 62 years or older have a fourth option, a reverse mortgage, which requires no monthly loan payment.
The same $50,000 three ways
The choice often comes down to the rate on the mortgage you already have. If it is well below today’s rates, a cash-out refinance gives that rate up on the whole balance.
$360,000 home, $200,000 owed at an example rate of 4.5% with 25 years left — raising $50,000
| Option | New monthly payments on the home | Change from today |
|---|---|---|
| Do nothing (current mortgage) | $1,112 | — |
| Cash-out refinance: $250,000 over 30 years at 7.24% | $1,704 | +$592 |
| HELOC at 8.00% (prime + an example 1-point margin), interest-only | $1,445 | +$333 |
| Same HELOC once 20-year repayment starts | $1,530 | +$418 |
| Home equity loan, 15 years at an example fixed 8.25% | $1,597 | +$485 |
Closing costs are left out. The HELOC rate moves with prime: if prime rose 2 points, the interest-only payment on the line would be $417 and the repayment payment $483.
In this case the cash-out refinance costs the most each month because it moves $200,000 of low-rate debt to today’s rate. If your current rate were at or above today’s average, the comparison could flip. The HELOC payment calculator and the refinance break-even calculator let you run your own numbers.
Open calculatorHow HELOC payments change over time
A HELOC has two phases. During the draw period — 10 years in the CFPB’s example — you can borrow, repay and borrow again, and many plans require only interest. When it ends, you can’t draw any more and the balance is repaid with principal and interest over a repayment period that often runs up to 20 years, or on some plans in a single balloon payment. In the example above the line’s payment rises from $333 to $418 a month, a 25% jump, even if rates don’t move. Plan for that date well ahead; HELOC draw and repayment periods covers the options.
Requirements
Lenders look at four things, and set most thresholds themselves:
- Equity — enough that all loans on the home stay within their CLTV limit after the new loan.
- Credit — a score and payment history they accept; a higher score usually means a lower margin or rate.
- Income and debts — the new payment must fit within the debt-to-income ratio they allow, and HELOCs are often qualified at a payment that includes principal.
- The property — a principal residence is easiest; second homes and rentals face tighter limits, and some lenders don’t lend on them at all.
Texas adds its own constitutional rules for homesteads: borrowing capped at 80% of value, lender fees capped at 2% of the principal, at least 12 days between application and closing, and generally 12 months between home equity loans. See home equity requirements and the Texas guide.
Costs and your right to cancel
Home equity loans and HELOCs can carry an appraisal, origination and title charges, and HELOCs sometimes add annual, inactivity or early-closure fees. Federal rules require HELOC lenders to give you disclosures and a CFPB brochure with the application, and they can’t charge a nonrefundable fee until 3 business days after you receive them.
The risks
Your home is the collateral. If you can’t make the payments, the lender can foreclose — even if your first mortgage is current. Variable HELOC rates can rise with prime. A lender can freeze a HELOC or cut its limit if your home’s value falls significantly — the official interpretation treats a drop that halves the original cushion of equity above the credit limit as significant — or if your finances change materially, and must notify you within 3 business days. A falling market can leave you owing more than the home is worth.
Risks of borrowing against your home covers each one with numbers.
Taxes on home equity interest
Interest on a HELOC or home equity loan is deductible only if you use the money to buy, build or substantially improve the home that secures the loan, and only on combined mortgage debt up to $750,000 for loans taken out after December 15, 2017. You also have to itemize, which pays only when your deductions beat the standard deduction — $16,100 for single filers and $32,200 for married couples filing jointly in 2026. This is general information, not tax advice; see home equity interest and taxes.
How to borrow against your equity, step by step
Define the need
A fixed amount for a single cost points to a home equity loan; spending over time points to a HELOC.
Estimate your equity
Recent sale prices nearby give a rough value; subtract every loan on the home.
Compare the three options
Weigh your current mortgage rate against today’s average before considering a cash-out refinance.
Get offers from several lenders
For a HELOC compare the index, the margin, any rate caps, the draw and repayment periods and the fees; for a loan compare the APR.
Plan the repayment
Work out the payment when a HELOC’s draw period ends and if its rate rises 2 points.
Read the disclosures, then close
You have 3 business days after closing to cancel on your main home.
All home equity guides
Frequently asked questions
What is the difference between a HELOC and a home equity loan?
A HELOC is a revolving credit line, usually at a variable rate, that you draw on as needed and often pay interest-only on at first. A home equity loan is a lump sum at a fixed rate, repaid in equal monthly payments. Both are usually second mortgages that leave your first mortgage in place.
How much equity can I borrow?
Multiply your home’s appraised value by the lender’s combined loan-to-value limit and subtract what you owe. On a $360,000 home with $200,000 owed, an 80% limit leaves about $88,000.
Is a HELOC or a cash-out refinance better?
If your current mortgage rate is well below today’s rates, a HELOC or home equity loan usually costs less, because a cash-out refinance moves your whole balance to the new rate. If your rate is at or above today’s, a cash-out refinance can make sense, especially for a large sum.
What rate will I pay on a HELOC?
Most HELOCs use a variable rate: an index, often the prime rate (7%), plus a margin set by the lender based on your credit and equity. When prime changes, your rate and payment change.
Can a lender freeze my HELOC?
Yes. Federal rules let a lender suspend draws or reduce your limit if your home’s value falls significantly, if your finances change materially or if you default on a key term. It must tell you in writing within 3 business days.
Is home equity interest tax-deductible?
Only if the money buys, builds or substantially improves the home securing the loan, within the IRS limit of $750,000 of mortgage debt for loans after December 15, 2017, and only if you itemize.
Can I cancel a home equity loan after signing?
Yes, on your principal residence you have 3 business days after closing to cancel a HELOC, home equity loan or refinance with a new lender, under the federal right of rescission.
Sources
- Freddie Mac Primary Mortgage Market Survey — 30-year fixed rate, national weekly average (Week of Oct 29, 2026)
- Federal Reserve H.15 — Bank prime loan rate (Oct 28, 2026)
- US Census Bureau, American Community Survey 2024 1-year — Median value of owner-occupied homes (2024 ACS 1-year)
- CFPB — Example HELOC draw period (CFPB); HELOC repayment period, often up to (CFPB) (Aug 28, 2026)
- Fannie Mae Eligibility Matrix — Fannie Mae cash-out refinance maximum LTV, one-unit principal residence (Apr 1, 2026)
- Texas Constitution, Art. XVI §50(a)(6) — Maximum combined loan-to-value for Texas home equity loans; Texas home equity fee cap (share of original principal); Minimum wait after application before a Texas home equity loan can close (Nov 7, 2017)
- Freddie Mac My Home — Typical refinance closing costs, low end (share of loan principal); Typical refinance closing costs, high end (share of loan principal) (Oct 28, 2026)
- 24 CFR 206.33 — HECM reverse mortgage: youngest borrower must be at least (Oct 7, 2026)
- 12 CFR 1026.40(h) — No nonrefundable HELOC application fee until this long after you receive the disclosures and brochure (Oct 28, 2026)
- CFPB — Right to cancel a refinance or home equity loan on your principal home; After you cancel, the lender must return your money and release the lien within (Aug 8, 2024)
- 12 CFR 1026.9(c)(1)(iii) — Lender must send written notice of a HELOC freeze or credit-limit cut within (Oct 28, 2026)
- 12 CFR 1026.32(a)(1)(i) — High-cost mortgage trigger: APR more than this many percentage points above the average prime offer rate (subordinate lien); High-cost mortgage trigger: points and fees above this share of the total loan amount (Oct 28, 2026)
- IRS Publication 936 — Mortgage debt on which interest is deductible (loans after Dec 15, 2017) (Tax year 2025)
- IRS — 2026 standard deduction, single filers; 2026 standard deduction, married filing jointly (Tax year 2026)
- CFPB: What you should know about HELOCs (brochure)
- IRS Publication 936: Home Mortgage Interest Deduction
Last reviewed Figures are checked against the sources above. Read our editorial policy. This page is general information, not financial advice — see the disclaimer.