If your home has grown in value, you may be able to borrow against that equity for renovations, debt consolidation, or a down payment on another property. The three main options work very differently, and choosing the wrong one can cost you.
First, How Much Can You Borrow?
Lenders usually limit how much you can borrow against your home based on your total loan balances compared with the home's value. Many cap combined borrowing somewhere around 80% to 85% of value. Rules also vary by state. Texas, for example, generally caps home equity borrowing at 80% of the home's value and has additional consumer protections.
Example: A home worth $400,000 with a $250,000 mortgage. At an 80% limit, total borrowing could reach $320,000, leaving roughly $70,000 available before closing costs.
The Three Main Options
HELOC (Home Equity Line of Credit)
A revolving line you draw from as needed, usually with a variable rate. It often has a draw period followed by a repayment period. It's good for ongoing or uncertain costs, like a renovation paid in stages. The trade-off: your payment can rise if rates go up.
Home Equity Loan
A lump sum, typically at a fixed rate with a set payment. Your existing mortgage stays in place. It works well for a single, known expense.
Cash-Out Refinance
Replaces your current mortgage with a larger one and gives you the difference in cash. You'll pay closing costs, and your whole mortgage balance moves to the new rate. It can make sense when current rates are similar to or lower than your existing rate, and less sense if you'd give up a much lower rate.
Questions to Ask Before You Borrow
- What will the total monthly payment be, and can you afford it if your income changes?
- What are the closing costs and fees?
- Is the rate fixed or variable?
- Will the money go toward something that improves your finances or your home's value?
Remember: your home is the collateral. Borrowing against it for everyday spending puts the home at risk.
Run Your Numbers
The Home Equity Workbook + eBook estimates your equity, compares HELOC, home equity loan, and cash-out refinance options, and walks you through a stay, sell, borrow, or hold decision. Planning a renovation with it? See Before You Renovate™.
Written by Marchelle Cook, a Realtor for 26 years and a real estate investor and property manager since 2012. This article is for educational purposes only and is not lending, tax, or legal advice. Loan terms and state rules vary; consult a qualified lender and tax professional.
Read our editorial standards and how we explain the numbers.