Tapping your equity without refinancing

You build equity in your house every time you pay down your mortgage or home values rise in your area. And when you sell the house, that equity translates to profits in your pocket.

While you still live in the home, you can borrow against your equity too, using tools like home equity loans and home equity lines of credit (HELOCs). Not to be confused with refinancing, these are both types of second mortgages that you take out in addition to your original mortgage loan — and they can help turn your equity into cash when you need it.

Are you looking to borrow from your home’s equity? While both HELOCs and home equity loans can help you do it, they aren’t one and the same. Here’s how the two compare — and when you might want to use one to access your equity.

Learn more: What is a second mortgage, and how does it work?

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The first step in borrowing from your home equity is to calculate how much available equity you have in your home. To do this, you’ll need two numbers: your mortgage balance and the value of your house.

To determine how much equity you have, simply take your home’s value and subtract your existing mortgage balance. For example, if your house is worth $300,000, and your outstanding balance is $150,000, you have $150,000 in equity.

Take note, though: Most lenders won’t let you borrow 100% of that. Typically, lenders will loan you between 80% and 85% of your equity — minus your current loan balance.

Here’s an example, using an 85% equity lender limit and a $300,000 home with a $150,000 mortgage balance.

The calculation:

$300,000 home value x 0.85 = $255,000

$255,000 – $150,000 = $105,000

In the above example, you could potentially borrow up to $105,000 using a home equity loan or HELOC.

Read more: How much is your house worth? Here’s how to determine your home value.

A home equity line of credit, or HELOC, is a revolving credit account that allows you to make on-demand withdrawals from an approved balance limit. You draw from the line of credit as you wish — throughout what’s called the “draw” period — and repay it over time during the “repayment period.”

It is similar to a credit card, but because it is guaranteed by your home, it’s likely to have a lower interest rate than most credit cards.

With HELOCs, you only pay interest on what you actually withdraw from the credit line. Even better, the interest you pay can be tax deductible if you use the proceeds to “buy, build, or substantially improve” your home, according to the IRS.

Learn more: How a home equity line of credit (HELOC) works

HELOCs are like credit cards in another way: They generally have variable interest rates that go up and down as time passes. Their minimum payments also change. That’s because, in addition to the changing interest rate, you may draw from the line of credit in various amounts over time, so your balance and your interest rate are likely to vary too

A HELOC will have a draw period (generally 10 years) and a repayment period (typically 20 years). You may be given the option to pay only interest on the current balance during the draw period. During the repayment period, principal and interest payments will kick in.

Tip: Some lenders allow you to convert at least a portion of the remaining balance on a variable-rate HELOC to a fixed interest rate. This can help you better budget for your payments and control your costs.

Dig deeper: How do fixed-rate HELOCs work, and which lenders offer them?

HELOCs are suitable for cash needs that change over time. That might include unexpected expenses, home improvements you tackle one at a time, or medical bills such as out-of-pocket costs not covered by insurance.

Read more: The best HELOC lenders

• You can draw from the credit limit as needed over an extended period of time

• You may make interest-only payments during the draw period.

• Lenders might offer an optional conversion to a fixed interest rate.

• If interest rates are falling, your payment could be reduced.

• Interest paid may be tax deductible.

• You only pay interest on the amount you withdraw — not the full credit line.

• They may not have closing costs, depending on the lender.

• Not all lenders offer HELOCs.

• Your home is held as security for the amount you borrow, so you can lose it to foreclosure if you don’t make your payments.

• Monthly payments will increase when principal payments are due.

• A variable interest rate means unpredictable payments — and higher payments if interest rates rise.

• A lender can shut off credit lines at their discretion.

• Annual or early closure fees may apply.

Learn more: How to get a HELOC in 6 simple steps

A home equity loan, or HEL, is a second mortgage where a portion of your home’s equity is delivered to you in a lump sum.

These generally have a fixed interest rate, and as with your primary mortgage, you pay the loan amount off over several years.

Like a HELOC, the interest you pay on home equity loans may be tax deductible so long as you use the funds to improve your house.

Dig deeper: What is a home equity loan? A complete overview

In the example above, rather than giving you access to draw on that $105,000 line of credit, you would receive up to $105,000 in a lump sum. You could then use the funds however you wish, paying the balance back — plus interest — in fixed monthly payments for the entire loan term.

Home equity loan terms generally range from five to 30 years.

Read more: How much can you borrow with a home equity loan?

Home equity loans may be appropriate if you have a significant known expense coming up — such as major home renovations or repairs — or to consolidate debt, as home equity products tend to have lower rates than credit cards, personal loans, and other consumer borrowing products.

Tip: Remember, your home is used as collateral for a home equity loan, so paying off unsecured debt, like credit cards, with a home equity loan is probably not a good idea unless you’re absolutely sure you can make your payments. If you can’t, you might lose your home to foreclosure.

Keep learning: The best home equity loan lenders

• You get a large lump sum of money you can spend as you like.

• A fixed interest rate means your monthly payment won’t change.

• Interest paid may be tax deductible.

• Rates may be lower than on other borrowing products, like credit cards and personal loans.

• Repayment begins shortly after the lump sum is issued.

• Your home is held as security for the loan, so if you don’t make your payments, you could lose it to foreclosure.

• You’ll pay interest on the entire loan amount, even if you don’t spend it all.

• Closing costs may be higher than for a HELOC.

Learn more: Do you have to pay home equity loan closing costs? Yes — here’s what to expect.

Specific loan requirements vary by lender, but generally, home equity loans and HELOCs require a borrower to:

• Have a FICO credit score of 680 or higher.

• Show a history of good credit and proof of sufficient monthly income.

• Obtain an appraisal to determine the current market value of the home.

• Have at least 15% to 20% equity in the house.

• Have a debt-to-income ratio of 43% or less.

• Show proof of in-force homeowners insurance.

Lenders may charge origination fees and other closing costs on a HELOC or home equity loan. When shopping for yours, make sure to ask about all possible application fees, annual charges, early account closure fees, and other one-time or ongoing expenses. Shop multiple lenders to find the lowest interest rate and the fewest fees.

Read more: The requirements for getting a home equity loan

Another way to tap the equity in your home is with cash-out refinancing. This is when you replace your current mortgage with a larger one, getting the difference between those two balances back in cash.

This ensures you have just one monthly payment, rather than the two a home equity loan or HELOC would come with.

You may need more than 20% equity in your home for a cash-out refinance, though some refinance programs offer lower equity requirements. You’ll also want to be sure that prevailing interest rates are close to or below your current mortgage rate, or you could end up paying much more in interest — both monthly and over the long haul.

Also, keep in mind that interest rates on cash-out refinances are often higher than traditional refinances. Closing costs on a cash-out refinance are often higher than for HELOCs and home equity loans, too.

Dig deeper:

Whether a HELOC or home equity loan is the right choice largely depends on your goals and budget. If you need access to a large amount of cash soon — for a known expense or unexpected repair, for instance — then a home equity loan is likely the best choice. And if a fixed, stable payment that stays the same for the long haul is important to you, a home equity loan could be the best choice.

If, on the other hand, you want to have cash to pull from for many years to come — and you have the financial flexibility to manage payments that can increase over time — then a HELOC may be the better choice.

If you’re still not sure which to choose, talk to a mortgage professional. They can help you run the numbers for both options and see which suits your household best.

No, home equity loans and HELOCs are two different types of second mortgages that help you tap your home equity. A home equity loan gives you money in one lump sum, and a HELOC is a line of credit you can withdraw from when you need money (sort of like a credit card).

What is the difference between a home equity loan and a HELOC?

Both home equity loans and home equity lines of credit (HELOCs) are types of second mortgages. With a home equity loan, you receive the borrowed money in one lump sum. A HELOC is a line of credit, meaning you can borrow money as you need it — and only pay interest on the funds you actually end up using. Although there are exceptions, a home equity loan usually has a fixed interest rate, and a HELOC typically has a variable rate.

If you take out a $50,000 home equity loan, you will receive all of the money at once and pay interest on the full amount. With a HELOC, you can withdraw money whenever you need it. For example, you may take out $10,000 to remodel your kitchen, then $20,000 to replace your roof, and never touch the remaining $20,000. You only pay interest on the money you actually withdraw and use.

A home equity loan is better if you want a large lump sum of cash all at once or a fixed, predictable monthly payment for the long haul. HELOCs are a better choice if you need access to money over an extended period and can deal with changing interest rates and monthly payments.

This article was edited by Laura Grace Tarpley.