You can pull equity out of your home through three main options: a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance. Each works differently, and the best choice depends on how much you need, whether you want it all at once or over time, and what interest rate structure fits your budget. A fourth option, home equity contracts, exists but comes with significant trade-offs worth understanding before you consider it.
How Much Equity Can You Access?
Lenders don’t let you borrow against all your equity. They cap how much you can take out using a number called your combined loan-to-value ratio (CLTV), which compares your total mortgage debt (including the new borrowing) to your home’s current appraised value. Most lenders cap CLTV at 80% to 85%, meaning you need to keep at least 15% to 20% equity in the home after the new loan.
Here’s what that looks like in practice. Say your home is worth $400,000 and you owe $250,000 on your mortgage. With an 85% CLTV cap, your total borrowing can’t exceed $340,000. Since you already owe $250,000, you could access up to $90,000 in equity. If your lender uses an 80% cap, that number drops to $70,000.
Home Equity Loans
A home equity loan gives you a lump sum at a fixed interest rate, repaid in equal monthly installments over a set term, typically five to 30 years. It’s a second mortgage, meaning it sits on top of your existing loan. Because the rate is fixed, your payment stays the same for the life of the loan, which makes budgeting straightforward.
This option works well when you know exactly how much money you need and want predictable payments. Common uses include large home renovations, debt consolidation, or major one-time expenses. The downside is that you’re borrowing the full amount from day one and paying interest on all of it immediately, even if you don’t need the money right away.
Home Equity Lines of Credit
A HELOC works more like a credit card. You get approved for a maximum credit limit, then draw from it as needed during an initial draw period that can last up to 10 years. During that time, you typically make interest-only payments on whatever you’ve borrowed. Once the draw period ends, you enter a repayment period of 10 to 20 years, where you pay back both principal and interest.
Most HELOCs carry variable interest rates, so your payments can change as rates move. This flexibility is useful when you have ongoing expenses, like a renovation project that unfolds in phases, or when you’re not sure exactly how much you’ll need. You only pay interest on what you actually use, not the full credit line.
HELOCs come with a few fees that home equity loans don’t. Some lenders charge an annual fee of $5 to $250 just to keep the line open. If you close the HELOC early, you may owe a cancellation fee of 2% to 5% of the loan amount, or a flat fee of $200 to $500. Some lenders also charge inactivity fees if you don’t use the line for an extended period.
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage entirely with a new, larger one. You receive the difference between the new loan amount and your old balance as a lump sum at closing. The new loan becomes your only mortgage, so you make a single monthly payment going forward.
This approach makes the most sense when current mortgage rates are lower than your existing rate, since you’d be improving your terms while also accessing cash. If rates are higher than what you’re currently paying, a cash-out refinance means increasing your rate on your entire mortgage balance, not just the new money you’re borrowing. That can add up to a significant cost over the life of the loan. In a high-rate environment, a home equity loan or HELOC that only applies the higher rate to the amount you’re borrowing often costs less overall.
What You Need to Qualify
Requirements are similar across all three options, though specifics vary by lender.
- Credit score: Most lenders require a minimum score of 620, though some set their floor at 660 or 680. A higher score generally gets you a better rate.
- Equity: You typically need at least 15% equity in your home, corresponding to a maximum 85% loan-to-value ratio.
- Debt-to-income ratio: Lenders want to see that your total monthly debt payments, including the new loan, don’t consume too large a share of your gross income. Most prefer this ratio to stay below 43% to 50%.
- Appraisal: Your lender will order an appraisal to confirm your home’s current market value. This determines how much equity you actually have available.
Closing Costs and Fees
Pulling equity from your home isn’t free. Closing costs on home equity loans and HELOCs typically run 1% to 5% of the total loan amount. On a $80,000 loan, that’s $800 to $4,000. Cash-out refinances tend to have higher closing costs because you’re refinancing the entire mortgage, not just adding a second lien.
Common fees include an origination fee (0.5% to 1% of the loan amount), an appraisal fee ($300 to $450), a title search ($75 to $200), title insurance ($1,000 to $4,000), and various smaller charges like credit report fees ($10 to $100) and notary or filing fees ($20 to $100). Some lenders waive certain fees to attract borrowers, so it pays to compare offers from multiple lenders and look at the total cost, not just the interest rate.
Tax Rules for Interest Deductions
Whether you can deduct the interest depends entirely on how you use the money, not on the type of loan. Interest is deductible when the funds go toward buying, building, or substantially improving the home that secures the loan. Adding a deck, remodeling a kitchen, or replacing your roof all generally qualify. Routine maintenance like repainting or fixing a leak does not.
If you use the money for anything else, like paying off credit card debt, covering tuition, or funding a vacation, the interest is not deductible. And if you deposit the funds into a general bank account and use them for a mix of purposes, you may lose the deduction entirely because you can’t clearly document which dollars went toward qualifying improvements. Keep invoices, contracts, and receipts that tie each withdrawal directly to a specific home improvement project.
Home Equity Contracts
A newer alternative markets itself as a way to access equity with no monthly payments and no interest. Companies offering home equity contracts (sometimes called home equity investments) give you an upfront lump sum. In return, they take a stake in your home’s future value, with repayment due when you sell, refinance, or reach the end of the contract term, often 10 to 30 years.
The marketing can sound appealing, especially the “no monthly payments” pitch, but the economics deserve scrutiny. These companies typically use a multiplier on their investment. For example, you might receive 10% of your home’s value in exchange for a 20% stake in its future value, a 2x multiple that guarantees the company doubles its money before any appreciation is factored in. Some companies also discount your home’s starting value by as much as 25%, further tilting the math in their favor. Processing fees of 3% to 5% reduce the cash you actually receive.
The CFPB has flagged that repayment amounts can reach into the hundreds of thousands of dollars, and rate caps on some contracts allow the settlement amount to grow by roughly 19% to 22% per year. If your home appreciates significantly, you could end up paying far more than you would have with a traditional loan. These contracts can work for homeowners who truly cannot qualify for conventional borrowing, but for most people, a home equity loan or HELOC will cost less over time.
Choosing the Right Option
Start by clarifying two things: how much you need and how you plan to use the money. If you need a specific amount all at once and want a predictable payment, a home equity loan is the simplest path. If your needs are ongoing or uncertain, a HELOC gives you flexibility to borrow only what you use. If mortgage rates have dropped since you got your original loan, a cash-out refinance lets you lower your rate and access cash in one transaction.
Get quotes from at least three lenders. Compare the annual percentage rate (APR), which bundles the interest rate and fees into a single number, making it easier to see the true cost. Pay attention to closing costs, especially on smaller loans where fees eat up a larger share of the proceeds. A lender offering a slightly higher rate but no closing costs may save you money if you plan to pay off the balance within a few years.