Home equity is the portion of your home’s value that you own outright — the difference between what the home is worth and what you still owe on your mortgage. For many homeowners, especially those who have owned their homes for years, equity represents one of their largest financial assets.
There are three main ways to access that equity while keeping the home: a home equity line of credit (HELOC), a home equity loan, and a cash-out refinance. Each works differently and is better suited to different situations.
Home Equity Line of Credit (HELOC)
A HELOC is a revolving line of credit secured by your home — similar in structure to a credit card, but with your home as collateral. You are approved for a maximum borrowing limit and can draw from it as needed during a draw period, typically 10 years. During the draw period, you generally only need to make interest payments on what you borrow.
After the draw period ends, the repayment period begins — usually 10 to 20 years — during which you repay both principal and interest. Most HELOCs have variable interest rates, which means your payment can change as rates move.
Best for: Ongoing expenses where you need flexibility — home renovations done in phases, college tuition over several years, or a financial buffer for unpredictable costs.
Home Equity Loan
A home equity loan gives you a single lump sum that you repay over a fixed term at a fixed interest rate. Payments are the same every month, making it easier to budget. The loan is separate from your original mortgage — you end up with two mortgage payments.
Best for: A specific, one-time expense — a major home repair, medical bills, or consolidating high-interest debt — where you want predictable monthly payments and a defined payoff date.
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a new, larger one. The difference between the new loan amount and your current mortgage balance is paid to you in cash. You walk away with a single mortgage at the new loan amount and whatever rate you qualify for today.
Best for: Homeowners who can secure a lower interest rate than their current mortgage, or who want to consolidate into a single loan rather than adding a second. At current rates, this option is less attractive for homeowners who locked in low rates in prior years — refinancing at a higher rate increases your total interest cost.
What All Three Have in Common
In all three cases, your home is the collateral. If you fail to make payments, the lender can foreclose. This is the fundamental risk of any equity-based borrowing — and why it should be used thoughtfully, not as a source of everyday spending money.
All three also involve closing costs — appraisal fees, origination fees, title costs — that can range from 2 to 5 percent of the loan amount. Factor these costs in when deciding whether borrowing against equity makes financial sense for your situation.
How Much Can You Borrow?
Lenders typically allow you to borrow up to 80 to 85 percent of your home’s appraised value, minus what you still owe. For example, if your home is worth $300,000 and you owe $100,000, you might be able to access up to $140,000 to $155,000 in equity (80–85% of $300,000 minus $100,000).
Your credit score, income, and debt-to-income ratio also affect how much you can borrow and at what rate. Compare offers from multiple lenders before committing — rates and fees vary significantly.
Money Instructor does not provide tax, legal, or investment advice. This material has been prepared for educational and informational purposes only. You should consult your own advisors regarding your own financial situation.