Due to rising home values, the average homeowner gained an additional $20,000 in home equity between the third quarters of 2022 and 2023, according to data analytics firm CoreLogic. Borrowing against your home equity can be more cost-effective than other forms of borrowing, like credit cards or personal loans.
The most common ways to tap your home equity include home equity loans, home equity lines of credit (HELOCs), cash-out refinance mortgages and reverse mortgages. The best choice for you will depend on factors like how you plan to use the funds, market conditions and your long-term goals.
To understand how to get equity out of your house, we’ll explore your options and walk you through how to apply.
4 ways to tap your home equity.
To convert your home’s equity into cash, consider one of the four following options:
Home equity loan
Best for: Borrowing a lump sum without changing your current mortgage.
A home equity loan, also known as a second mortgage, is an installment loan secured by your property. Your first mortgage is unaffected, and the home equity loan takes a secondary lien position. This means that if you default on your loans and your home is sold to repay your debt, your primary mortgage will be repaid first, and the secondary lien will be repaid next.
Home equity loans have fixed interest rates — which means predictable monthly payments — and funds are provided in a lump sum. Lenders commonly offer repayment terms between five and 30 years.
How much you can borrow will depend on the amount of equity you have. Most lenders allow you to borrow up to 80% of your home’s equity, though some may allow up to 90%. To understand how to calculate your equity, continue reading below.
You’ll usually have to pay for an appraisal to qualify, and you’ll incur high upfront closing costs — often between 2% and 6% of your home’s value. As with any form of borrowing secured by your home, you run the risk of foreclosure if you can’t repay the debt.
| Pros | Cons |
|---|---|
| Fixed interest rates mean payments won’t change Rates are typically lower than other forms of borrowing, like credit cards or personal loans Your first mortgage won’t be affected Total borrowing costs are known upfront. | Closing costs are high You must know how much money you’ll need upfront An appraisal is likely needed You’ll have a second monthly mortgage payment Risk of foreclosure |
Home equity line of credit (HELOC)
Best for: Borrowing a variable amount.
A home equity line of credit, or HELOC, is a form of revolving debt that works like a credit card. During the draw period, which typically lasts 10 or 15 years, you spend funds as needed, up to your preset limit. Your monthly dues are typically interest-only payments, and you only repay what you’ve borrowed. When the draw period ends, you’ll repay your principal balance plus interest over a set term, usually spanning 15 to 20 years.
As with a home equity loan, your primary mortgage is unchanged when you borrow a HELOC. You can typically borrow up to 80% of the equity in your home (when combined with any other mortgages), though you may find lenders willing to let you borrow up to 90%.
HELOCs come with variable interest rates and often don’t have as many large upfront costs as home equity loans — for instance, you’re unlikely to need title insurance. A home appraisal will be necessary, and the lender will often charge administrative fees. Depending on the details of your line of credit, closing costs may be as much as those on a home equity loan: 2% to 6% of your loan amount.
“HELOCs generally have low to no closing costs and — given their variable nature — you’re able to benefit when rates start to come down without the need to refinance,” said Matthew Sanford, mortgage lending executive at Skyla Federal Credit Union.
| Pros | Cons |
|---|---|
| Borrow funds as needed Repay only what you borrow, rather than the full amount Interest-only payments during the draw period Variable rate could decline with the market. | Variable rate means your borrowing costs could go up over time, making monthly dues unpredictable An appraisal is likely needed You won’t know the overall cost upfront You’ll have a second monthly mortgage payment Risk of foreclosure. |
Cash-out refinance
Best for: Tapping equity and refinancing your current mortgage.
A cash-out refinance replaces your existing mortgage with a new loan for a larger amount. You’ll then repay your current loan with the proceeds from the cash-out refinance loan and keep the extra money for other uses. You can generally borrow up to 80% of what your home is worth and pay back your debt over 15 to 30 years.
Since you’re modifying your original loan, a cash-out refinance could be more expensive if your existing rate is lower than the rate on your new refinance loan. This may be the case if you borrowed in recent years when rates were near record lows. However, if your credit has significantly improved since you borrowed your home loan, you may qualify for a lower rate.
You’ll have a choice of a fixed or variable rate with a cash-out refinance loan. While interest rates are typically lower on cash-out refinance loans than, say, a credit card or personal loan, you’ll pay more in interest than you would if you weren’t cashing out equity. And closing costs are often high, typically between 2% and 6% of the loan amount.
If you itemize deductions on your taxes, you can deduct mortgage interest on loans up to $750,000. Interest may be deductible on home equity loans or lines of credit only if the funds are used to buy, build or substantially improve the property guaranteeing the loan. This restriction doesn’t apply to a cash-out refinance loan.
| Pros | Cons |
|---|---|
| Use the cash for any purpose without forfeiting tax benefits Fixed and variable rate options You may be able to lower your current mortgage rate Only one monthly payment to manage | Your current mortgage rate could increase Closing costs are high An appraisal may be needed You must know how much money you need upfront Risk of foreclosure. |
Reverse mortgage
Best for: Supplemental income if you’re a senior
If you’re 62 or older, a reverse mortgage allows you to borrow against your home equity without making monthly payments to your lender. You may receive a lump sum upfront, monthly disbursements or access to a line of credit to supplement your fixed retirement income.
When the borrower of a reverse mortgage passes away, permanently moves out or sells the home, the amount borrowed is repaid with interest, typically by selling the home. The amount you can borrow depends on age, home value and loan interest rate.
Interest and fees are added to the loan balance each month, so the balance grows over time. Rates may be fixed or variable, and the proceeds you receive aren’t considered taxable income.
Besides the age requirement, the home must be your primary residence and you must own it outright or have a low mortgage balance. The approval process can be slower than with a conventional mortgage, sometimes taking as long as 90 days. Remember that you’ll still have to pay property taxes and insurance — if you don’t, you risk foreclosure.
| Pros | Cons |
|---|---|
| Use home equity to help fund retirement, Borrower can stay in the home, No monthly payments, Flexibility in how to receive loan proceeds, Reverse mortgage proceeds aren’t taxed as income | Slow approval process Interest and fees can be expensive, Loan balance grows over time, Home often has to be sold to repay the mortgage, Reduced equity can impact inheritance for heirs |
How to calculate your home equity
No matter which method you use to get equity out of your home, you usually can’t borrow more than 80% to 85% of its appraised value. So, you’ll need to know how much equity you have.
First, estimate your home’s fair market value (perhaps by using property search websites like Zillow and Trulia). (If you decide to move forward with a formal loan application, you’d have to pay between $300 and $800 for a formal appraisal, which could value your home at more or less than this initial estimate.) Then, subtract the value of all mortgage loans from that value. This includes your primary mortgage and any home equity loans or lines of credit. Here’s an example:
- Your home is worth about $500,000
- You have a mortgage with a $250,000 balance
Subtract $250,000 from $500,000 to determine that you currently have $250,000 of equity in your home. If your home equity loan lender caps your maximum loan-to-value ratio at 80% of your home’s value, the total amount of debt can’t exceed 80% of $500,000, or $400,000. Since you already owe $250,000, you can borrow $150,000 more.
If you borrowed a home equity loan worth $150,000, your total loan balance would be $400,000 on a home worth $500,000, so you would have $100,000 in equity remaining.
Which home equity product is right for you?
To determine which home equity product is best for your situation, ask yourself a few key questions:
- Do you want to modify your current mortgage? A cash-out refinance loan could be a good option if you can secure a lower interest rate than you currently pay. If your rate will increase, consider a home equity loan or line of credit instead.
- Do you want a fixed- or variable-rate loan? Home equity lines of credit generally only offer variable interest rates, so a cash-out refinance or home equity loan would be your best choice for a fixed rate.
- Do you know how much you need to borrow? If a lump sum will meet your borrowing needs, a home equity loan or cash-out refinance can provide that. But let’s say you’re planning a big home improvement project and aren’t sure how much money you’ll need — in that case, a HELOC might be best.
- Are you over the age of 62? If you have a significant amount of equity and are a senior citizen, you may qualify for a reverse mortgage. Keep in mind that you’ll still have ongoing home expenses to pay (like property taxes and HOA dues), and either you or your heirs will have to repay the borrowed funds when you no longer live in the home.
Pros and cons of borrowing against your home equity
| Pros | Cons |
|---|---|
| Interest rates are usually lower than on unsecured loans or credit cards Interest may be tax deductible Multiple borrowing options | Risk of foreclosure Risk of becoming upside down on your mortgage Closing costs can be expensive Approval and funding process can take several weeks |
Tapping your home equity can be an affordable way to borrow because it’s a secured form of debt — secured debt typically comes with lower interest rates because the collateral lowers the risk to the lender. Credit cards and personal loans tend to come with higher financing costs since there are no assets securing the financing.
On the other hand, when you borrow against your home’s equity, you put your home at risk. If you can’t repay the loan as agreed, your lender can foreclose on the property to recoup its losses.
Plus, if the real estate market experiences a downturn, your home value may drop and you could end up owing more money than the home is worth (also known as being upside down). This could be a problem if you decide to sell the property since you won’t be able to sell it for enough to pay off your mortgage loan.
How to apply for a home equity product
- Check your credit. Lenders review your credit profile to determine the amount of risk you present as a borrower. The higher your credit scores, the better. You may be able to view your credit scores for free through your credit card issuer or financial institution, or you can use a third-party service for a fee. Also, pull your free weekly credit reports at AnnualCreditReport.com and review them for errors.
- Calculate your equity. Estimate what your house is worth and subtract the total amount you already owe on it. Then, consider how much you want to borrow — the amount you owe and the amount you borrow combined should be less than 80% of your equity. Online realty sites can help you estimate your home’s value, but a home appraisal is the way to know for sure.
- Choose which product fits your needs. Is a lump-sum home equity loan the right choice? Or do you need the borrowing flexibility that a HELOC can provide? If you can secure a lower interest rate than you’re currently paying on your mortgage, a cash-out refinance loan might be best.
- Research lenders. Get pre-qualified with multiple banks, credit unions and online lenders to determine your eligibility and estimate the rates and terms you may receive. Plug this information into a loan calculator to confirm that your potential monthly dues would fit within your budget.
- Submit your application. Once you’ve found a lender, submit a formal application. You’ll need to provide documentation like bank statements, proof of income and employment verification and arrange a home appraisal. Be sure you understand the terms of your loan contract and repayment obligations before signing on the dotted line.
By
Christy Bieber, Katie Lowery, Andrew Pentis,