If you’ve built up equity in your home, you can borrow against it, sell a share of it, or simply let it grow as a long-term asset. Most homeowners tap equity through one of three borrowing products: a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance. Each works differently and suits different goals, from funding a renovation to consolidating high-interest debt.
How Much Equity You Actually Have
Your equity is the difference between your home’s current market value and what you still owe on your mortgage. If your home is worth $400,000 and you owe $250,000, you have $150,000 in equity. Most lenders let you borrow up to 80% to 85% of your home’s value, minus your existing mortgage balance. In that example, borrowing up to 80% of value means you could access roughly $70,000.
Equity grows in two ways: as you pay down your mortgage principal each month, and as your home appreciates in value. Even if you haven’t lived in your home for decades, a strong local housing market can build substantial equity in just a few years.
Borrow a Lump Sum With a Home Equity Loan
A home equity loan gives you a single lump sum at a fixed interest rate, repaid over a set term that typically ranges from five to 30 years. You make predictable monthly payments of principal and interest for the life of the loan, which makes budgeting straightforward. This is a good fit when you know exactly how much you need upfront, like paying for a kitchen remodel with a firm contractor quote or covering a large one-time expense.
Because the rate is fixed, you’re protected from rising interest rates. The trade-off is that you start paying interest on the full amount immediately, even if you don’t use all the funds right away.
Draw as Needed With a HELOC
A HELOC works more like a credit card than a traditional loan. You’re approved for a maximum credit limit and can 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.
HELOCs generally carry variable interest rates, meaning your payments can increase if rates rise. The flexibility is the main advantage: if you’re funding an ongoing project, covering intermittent expenses like tuition payments, or just want a financial safety net, you only pay interest on what you actually use. The risk is that variable rates can make long-term costs unpredictable, and that interest-only draw period can create a payment shock when full repayment kicks in.
Replace Your Mortgage With a Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a new, larger one. You receive the difference between your old balance and the new loan amount as a lump sum at closing. The new mortgage can have a fixed or adjustable rate, with terms up to 30 years.
This option makes the most sense when current mortgage rates are lower than your existing rate, because you’re refinancing your entire balance. If rates have risen since you got your original mortgage, a cash-out refinance could mean paying more interest on the portion of debt you already had, not just the new money you’re pulling out. In a high-rate environment, keeping your current mortgage and adding a home equity loan or HELOC on top of it is often the cheaper route.
What People Commonly Use Equity For
Home improvements are the most popular use, partly because renovations can increase your home’s value and partly because the interest may be tax-deductible (more on that below). Beyond renovations, homeowners frequently use equity to consolidate credit card debt or other high-interest loans, since home equity rates are typically much lower than credit card rates. Others use the funds for major life expenses: college tuition, medical bills, starting a business, or even as a down payment on a second property.
The key question is whether the use justifies putting your home on the line. Consolidating 22% credit card debt into a 9% home equity loan saves real money. Using equity to fund a vacation does not.
Tax Rules for Home Equity Interest
Interest on home equity debt is tax-deductible only if you use the borrowed funds to buy, build, or substantially improve your home. The IRS is specific about this: if you take out a HELOC and use it to remodel your kitchen, the interest qualifies for the mortgage interest deduction. If you use that same HELOC to pay off credit card balances or cover personal living expenses, the interest is not deductible.
This rule applies to tax years beginning after 2017, and the deduction is subject to overall mortgage debt limits. If the tax deduction matters to your decision, keep records showing exactly how you used the funds.
Sell a Share Instead of Borrowing
If you don’t want to take on debt or make monthly payments, home equity investments (sometimes called shared appreciation agreements) are a newer alternative. A company gives you a lump sum in exchange for a percentage of your home’s future appreciation. There are no monthly payments and no interest charges. When you eventually sell your home, refinance, or reach the end of the agreement term, you settle up based on how much your home’s value changed.
If your home’s value drops below the starting point, your repayment amount decreases. You’ll never owe more than your home is worth at the time of settlement. Unlike reverse mortgages, which are limited to homeowners age 62 and older, home equity investments are available to qualified homeowners regardless of age, and the agreement can be transferred to heirs.
The downside is cost. If your home appreciates significantly, you could end up giving away far more value than you would have paid in interest on a traditional loan. These products work best for homeowners who need cash but can’t qualify for conventional borrowing or who strongly prefer avoiding monthly payments.
Costs and Fees to Expect
Borrowing against your equity isn’t free. You’ll typically encounter some combination of an application fee, a property appraisal fee, and closing costs that can include attorney fees, title search charges, mortgage preparation and filing fees, and property or title insurance. Some lenders waive part or all of these upfront costs, especially for HELOCs, but that can mean a higher interest rate or a requirement to keep the line open for a minimum period.
With a cash-out refinance, closing costs tend to be higher because you’re originating an entirely new mortgage. Expect to pay 2% to 5% of the total loan amount. On a $300,000 refinance, that could mean $6,000 to $15,000 in fees, which can be rolled into the loan but still increase your total cost.
The Risk You’re Taking
Every home equity product uses your house as collateral. If you fall behind on payments or can’t repay the loan on schedule, you could lose your home to foreclosure. This is the fundamental trade-off: home equity borrowing offers lower rates than unsecured debt precisely because the lender has the right to take your property if you default.
HELOCs carry an additional risk. Some include a balloon payment at the end of the repayment period, requiring you to pay off any remaining balance in full. If you can’t make that payment through savings, refinancing, or another loan, foreclosure is a real possibility. Before signing any agreement, make sure you understand whether a balloon payment is part of the terms.
Let It Sit and Grow
You don’t have to do anything with your equity right now. Equity that stays in your home continues to grow as you pay down your mortgage and as property values rise. When you eventually sell, that equity becomes cash in your pocket, minus selling costs. For homeowners without an immediate financial need, simply building equity is one of the most reliable ways to accumulate wealth over time. Tapping it only makes sense when the benefit clearly outweighs the cost and risk of borrowing against your home.