Can I Take the Equity Out of My House?

Home equity is the portion of your home’s value you own, calculated as its market value minus outstanding loans. It grows through consistent mortgage payments and property appreciation. This accumulated value can be accessed by homeowners through various financial products.

Home Equity Loans

A home equity loan allows homeowners to borrow a fixed amount against their property’s equity. This second mortgage provides a lump sum at closing, with a fixed interest rate and predictable monthly payments over a 5 to 30-year term.

Eligibility requires a combined loan-to-value (LTV) ratio of 80% to 85%, a credit score of mid-600s or higher, and a debt-to-income (DTI) ratio below 43% to 50%. Applicants provide proof of income (pay stubs, W-2s, tax returns), property details (mortgage statements, insurance), personal identification, and a list of debts and assets.

The process includes a home appraisal and underwriting. If approved, closing involves signing documents. For primary residences, a three-business-day right of rescission applies before funds are disbursed. Interest paid on a home equity loan may be tax-deductible if used for home acquisition or improvement. This deduction is capped for loans originated after December 15, 2017, limiting it to a combined total mortgage debt of $750,000. Taxpayers must itemize deductions.

Home Equity Lines of Credit

A Home Equity Line of Credit (HELOC) offers a revolving credit line secured by home equity, similar to a credit card. It provides access to funds up to a set limit. It operates in two phases: a draw period (5-10 years) for accessing funds, often with interest-only payments, and a repayment period (10-20 years) where new draws are not permitted, and borrowers make regular principal and interest payments. HELOCs typically have variable interest rates, causing monthly payments to fluctuate. Some lenders allow converting portions to a fixed rate.

Eligibility requires a combined loan-to-value (LTV) ratio of 80% to 85%, a credit score above 620, and a debt-to-income (DTI) ratio below 43% to 50%. Applicants provide personal identification, income verification (pay stubs, W-2s, tax returns), and property details (mortgage statements, insurance). An appraisal determines the home’s market value and credit limit, followed by underwriting.

Upon approval, funds are accessible via checks, debit cards, or online transfers. A three-business-day right of rescission applies for primary residences before disbursement. Interest may be tax-deductible if used for home acquisition or improvement, subject to the $750,000 combined mortgage debt limit for loans originated after December 15, 2017.

Cash-Out Refinancing

Cash-out refinancing replaces an existing mortgage with a new, larger one, converting home equity into liquid cash. The new loan pays off the original, and the homeowner receives the difference as a lump sum. This establishes a new first mortgage, often with revised rates and terms.

Eligibility typically requires at least 20% home equity, with the new loan capped at 80% of the home’s appraised value. A credit score of 620 or higher is generally needed. Lenders assess a debt-to-income (DTI) ratio, commonly seeking 43% or less. A seasoning period, requiring 6 to 12 months of home ownership, may also apply.

Applicants provide income verification, property records, and personal identification. The process includes a home appraisal and underwriting. Upon approval, closing involves signing new mortgage documents and paying closing costs, typically 2% to 6% of the loan. A three-day right of rescission for primary residences precedes cash disbursement.

The cash received from a cash-out refinance is generally not taxable income. Interest paid on the new mortgage may be tax-deductible if used for home acquisition or improvement. This deduction is capped on a combined total mortgage debt of $750,000 for loans originated after December 15, 2017.

Reverse Mortgages

A reverse mortgage allows homeowners, typically aged 62 or older, to convert a portion of their home equity into cash without making monthly mortgage payments. The loan becomes due when the last borrower permanently moves out, sells the home, or passes away.

Funds can be received as a lump sum, line of credit, or monthly payments. Interest accrues, increasing the loan balance. The homeowner retains ownership but must pay property taxes, insurance, and maintain the home. Most are non-recourse, meaning borrowers will not owe more than the home’s value at repayment.

Eligibility requires at least one borrower to be 62 or older for HECM, or 55 for some proprietary options. The home must be the primary residence with substantial equity, typically 50%. Mandatory counseling with a HUD-approved agency is also required.

Applicants provide proof of age and identity, property details (mortgage statements, tax bills, insurance), and the counseling certificate. The process includes a home appraisal and underwriting. Upon approval and closing, funds are disbursed per the chosen option. A three-business-day right of rescission applies before funds are released.