By the CalcLedger editorial team · Updated September 2026 · Examples use illustrative rates · How we calculate
If you've owned your home for a few years, you've probably built equity: the gap between what the home is worth and what you owe. There are three main ways to turn that equity into cash for a renovation, tuition, or paying off higher-interest debt. They can look alike at first, but they cost very different amounts.
First: how much can you borrow?
Most lenders cap your combined loan-to-value (CLTV), meaning all the debt secured by the home, at around 80% to 85% of its appraised value. The formula:
Example: a $450,000 home with a $250,000 mortgage. At 85% CLTV, you could borrow up to about $132,500. At a stricter 80%, about $110,000. Your credit score and debt-to-income ratio also affect the limit and the rate.
Option 1: Home equity loan
A home equity loan is a second mortgage paid out as one lump sum, usually at a fixed rate over 5 to 30 years. Your original mortgage stays exactly as it is.
Example: borrow $50,000 at 8.5% for 15 years. The payment is about $492 a month, and total interest over the full term is about $38,600.
Best for: a single large expense with a known cost, when you want a predictable payment.
Option 2: HELOC (home equity line of credit)
A HELOC works more like a credit card secured by your house. You get a credit limit and draw from it as needed during a draw period, often 10 years. During that time, many HELOCs require interest-only payments. After it ends, a repayment period, often 20 years, requires payments of principal and interest.
Most HELOCs have a variable rate tied to the prime rate, so your payment moves when the Federal Reserve changes rates.
Example: draw $50,000 at 9%. Interest-only payments are about $375 a month during the draw period. When repayment starts, the payment on the same $50,000 jumps to about $450 over 20 years, or more if rates have risen. This "payment shock" is the most common HELOC surprise.
Best for: expenses that arrive in stages, such as a renovation paid over months, or a backup fund you may not fully use. You only pay interest on what you draw.
Option 3: Cash-out refinance
A cash-out refinance replaces your whole mortgage with a new, larger one and pays you the difference in cash. You end up with one loan and one payment, usually at a lower rate than a second mortgage, because first mortgages are less risky for lenders.
The catch is that the new rate applies to your entire balance, not just the cash you take out.
Side by side: when your current rate is low
Suppose you owe $250,000 at 3.5% with 25 years left (payment about $1,252), and you need $50,000.
| Approach | Monthly payment | Rate on the $250k |
|---|---|---|
| Keep mortgage + $50k home equity loan (8.5%, 15 yrs) | ≈ $1,744 | Stays 3.5% |
| Keep mortgage + $50k HELOC (9%, interest-only) | ≈ $1,627 (rises later) | Stays 3.5% |
| Cash-out refi to $300k (6.5%, 30 yrs) | ≈ $1,896 | Jumps to 6.5% |
Even though the cash-out refinance has the lowest headline rate, it costs about $150 more a month than keeping the old mortgage and adding a home equity loan. It also stretches the whole debt over a fresh 30 years. That's because you give up a 3.5% rate on $250,000 to borrow $50,000. Cash-out refinances also carry full closing costs on the entire new loan. Home equity loans and HELOCs often have lower fees, and some lenders waive them.
The math flips if your existing rate is higher than today's refinance rates. Then a cash-out refinance can lower the rate on your old balance and give you cash at the same time.
Quick decision guide
- Your current mortgage rate is well below today's rates: keep it. Use a home equity loan for a fixed amount, or a HELOC for flexible or staged spending.
- Your current rate is at or above today's rates: compare a cash-out refinance, since it may lower your rate and get you cash.
- You need a predictable payment: home equity loan or cash-out refinance, both usually fixed.
- You're not sure how much you'll need: HELOC.
Use equity carefully
All three options put your home up as collateral. Missing payments can lead to foreclosure, which a credit card never can. Using equity to pay off credit cards can make sense because the rate is much lower. But if the card balances build up again, you've turned unsecured debt into debt secured by your house. Our debt consolidation guide covers that risk.
Interest on home equity debt may be tax-deductible if the money is used to buy, build, or substantially improve the home. It generally isn't deductible if you use it for other purposes. Check with a tax professional.
To estimate your credit line and HELOC payments, try the HELOC calculator. To compare fixed-rate offers, enter each amount, rate, and term in the loan calculator and look at both the monthly payment and the total interest.