Make Your Home Equity Work for You

Cash out with a refinance or get a home equity line or loan

How to Use Home Equity to Get Cash

If you need to consolidate debt, make a large purchase or pay for needed repairs to your home, you may have considered putting your home’s equity to work for you. There are three ways to get cash from your home’s equity: A cash-out refinance, a home equity line of credit (HELOC), or a second mortgage cash-out, also known as a home equity loan. Comparing lenders can help you find the best rates.

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Loan Amount

Up to 80% of home value

Loan Term

10 to 30 years

Interest Payments

May be tax-deductible

How Much Home Equity Do I Need to Get a Loan or Line of Credit?

The amount of equity you have in your home will determine how much money you can borrow. Typically, lenders allow homeowners to borrow up to 80 percent of their home’s value, less the amount they still owe on the mortgage.

For example, if your house is worth $100,000, then 80 percent of your home’s value is $80,000. If you still owe $60,000, a lender would allow you to borrow up to $20,000 against your available equity.

Lenders will consider other factors, as well, in deciding whether to approve your loan application, including your current income and credit history. Compare loans to know equity impacts the amount you can borrow.

What Is Home Equity?

Home equity is the fair market value of your home, less the amount you still owe on your mortgage. For example, if your home’s fair market value is $200,000, and you still owe $150,000 on your home, you have $50,000 in equity.

How Much Is My House Worth?

Before applying for a home equity loan or line, ask the question, “What is my house worth?” Answering this question will allow you to determine how much equity you have in your home.

There are a number of ways to determine a home’s worth, including its fair market value, appraised value and assessed value. Lenders will typically hire a certified appraiser to determine your home’s appraised value, and use this value to calculate the home’s equity and the amount they’ll allow you to borrow.

Fair Market Value
  • The price a house will sell for.
  • Usually determined with a comparative market analysis.
Appraised Value
  • The value of a house according to an appraiser’s inspection.
  • Determined by a certified appraiser.
Assessed Value
  • The value of a home used to calculate how much the owner owes in property taxes.
  • Determined by an assessor employed by a government entity.

How Does a Cash-Out Refinance Work?

A cash-out refinance, also known as a refinance cash-out, allows homeowners to refinance their mortgages for more than the amount of the original loan and receive the difference between the two amounts in cash. A refinance cash-out can be a good option if your home’s market value exceeds the mortgage debt by a comfortable margin and you are eligible to refinance your mortgage into a lower-interest loan. It’s also a good option if you have paid off your mortgage and want to cash out some of the equity. Otherwise, consider a home equity line of credit (HELOC) or home equity loan — both come with relatively higher rates, lower closing costs and shorter terms.

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How Do HELOCs Work?

A home equity line of credit is a line of credit secured against your home equity. Because the line is secured against your home’s equity, you often can obtain a lower interest rate than you could with unsecured loans.

Unlike a second mortgage cash-out, a HELOC is a form of revolving credit. This means you can borrow as much or as little as you want up to a certain limit, similar to a credit card. The interest rate varies throughout the life of the credit line. Paying down the balance frees up credit for you to use again.

Most HELOCs have what is known as a draw period — which typically lasts for 10 years — during which the borrower pays only interest each month. After the draw period ends, the borrower must make monthly payments toward both the interest and the principal of the outstanding balance. This can result in significantly higher monthly payments. Sometimes the entire balance of the loan becomes due in a single balloon payment after the draw period. Shop around to know which HELOC offers meet your financial requirements.

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How Does a Second Mortgage Cash-Out Work?

A second mortgage cash-out, also known as a home equity loan, is an installment loan, meaning you borrow a set amount of money, which is paid to you in an upfront lump sum, and pay it back over a predetermined amount of time — typically between 10 and 20 years — in fixed, monthly installments.

A home equity loan typically has a fixed interest rate, which means you will pay the same monthly payment over the life of the loan. It is also possible to get a home equity loan with a variable interest rate — meaning the interest rate can change, often more than once, throughout the life of the loan — although they are less common than fixed-rate home equity loans.

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What Is a Second Mortgage?

A second mortgage is a home loan taken out in addition to an outstanding home mortgage. A second mortgage cash-out and a HELOC are both considered second mortgages.

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How Much Does It Cost?

One of the most important considerations when deciding between a HELOC and a home equity loan (second mortgage cash-out) and a cash-out refinance is how much each option costs.

Cash-Out Refinance

  • Subject to closing costs, usually around 3-6 percent of the loan balance.
  • Interest payments may be tax deductible.
  • Resets your mortgage.

HELOC

  • Few, if any, upfront fees. May charge an annual fee.
  • Interest payments may be tax deductible.
  • May be subject to cancellation, inactivity or transaction fees.

Second Mortgage Cash-Out

  • Subject to closing costs, usually 2-5 percent of loan balance.
  • Interest payments may be tax deductible.
  • May be able to pay points to lower interest rate.

Compare Your Home Equity Loan Options

There are plenty of similarities between a HELOC, second mortgage cash-out and a cash-out refinance, but each option also has important distinctions.

Cash-Out Refinance

Interest Rate
Fixed rate with a new mortgage, which remains the same throughout the life of the loan.
Credit Type
Lump sum that you pay back over a predetermined amount of time in fixed payments.
Loan Term
A refinance replaces your first mortgage, usually “resetting the clock” with a repayment term of 15 or 30 years.

HELOC

Interest Rate
Variable interest rates that can fluctuate throughout the life of the loan.
Credit Type
Revolving credit, meaning you can use as much or as little credit (up to a certain limit) as you want, and reuse it after you’ve paid it down.
Loan Term
The draw period is typically 10 years, in which interest-only payments are made, followed by higher monthly payments that include principal and interest. Sometimes a balloon payment is due after the draw period.

Second Mortgage
Cash-Out

Interest Rate
Fixed rate, which remains the same throughout the life of the loan.
Credit Type
Lump sum that you pay back over a predetermined amount of time in fixed payments.
Loan Term
Installment loan typically repaid over 10-20 years.

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Can I Refinance a HELOC or Second Mortgage Cash-out?

After a HELOC’s draw period ends, your monthly payment could increase significantly. You may be able to refinance the HELOC into a new line of credit — which would have its own, new draw period — to avoid those larger monthly payments. You still would need to pay off the balance eventually, but this option helps you delay the process.

Another option is to pay off the HELOC with a second mortgage cash-out. Whereas HELOCs tend to have variable rates, a second mortgage cash-out usually has a fixed rate. The reverse is also true; it may be possible to refinance a second mortgage cash-out into a HELOC.

Another option for refinancing either a HELOC or a second mortgage cash-out is to roll the existing, outstanding balance into a newly refinanced mortgage.

Keep in mind that if your mortgage is underwater, meaning you owe more on your home than it is worth, you will have a difficult time getting a lender to refinance a HELOC or home equity loan, let alone your mortgage, although government programs exist to help eligible borrowers refinance underwater mortgages. Learn more about refinancing.

Borrow Wisely Tip

Over 62? Consider a Reverse Mortgage.

With a reverse mortgage, the lender pays you against your home’s equity, usually in the form of fixed monthly payments. Borrowers who take out a reverse mortgage do so to supplement their retirement income while continuing to live in their home. The balance of the loan becomes due when the borrower dies or moves out, and is often paid off by selling the house.

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