What is home equity?
Equity is the difference between what your home is worth and what you owe on it. It grows as you pay down your mortgage and as your home's value rises.
Lenders usually will not let you borrow against all of it. Instead, they cap your combined loan-to-value (CLTV), meaning all the loans on the home added together as a percentage of its value. The cap varies by lender, program, property type, and credit.
Hypothetical example
Your home is worth $500,000 and you owe $250,000. If a lender allowed an 80% CLTV, total borrowing could reach $400,000. Subtract the $250,000 you already owe, and up to about $150,000 might be available, before closing costs and subject to qualifying.
Our home equity calculator runs this math with your own numbers.
Three ways to tap your equity
1. Home equity line of credit (HELOC)
A HELOC is a revolving line of credit secured by your home, a bit like a credit card with a much larger limit. You draw what you need during a draw period, pay interest only on what you have used, and then repay over a repayment period. Your first mortgage stays untouched.
HELOC rates are usually variable, so payments can rise or fall. Some HELOCs require interest-only payments during the draw period, which means the payment can jump when repayment begins.
2. Closed-end second mortgage
A closed-end second mortgage (sometimes called a home equity loan or 2nd lien) gives you a lump sum up front with a fixed payment schedule. Like a HELOC, it sits behind your existing first mortgage, so you keep that loan and its rate. It suits a one-time, known cost.
3. Cash-out refinance
A cash-out refinance replaces your current mortgage with a new, larger one and pays you the difference in cash. You end up with one loan and one payment. The catch: your entire balance moves to the new rate. If your current rate is low, refinancing all of it to get cash out may cost more over time than a second lien on just the amount you need.
| Option | How you get the money | Your first mortgage | Often fits when |
|---|---|---|---|
| HELOC | Draw as needed, up to a limit | Stays in place | Costs arrive over time, like a phased renovation |
| Second mortgage | One lump sum, fixed payments | Stays in place | You need a set amount and want a predictable payment |
| Cash-out refinance | One lump sum at closing | Replaced by the new loan | The new rate and terms make sense on the whole balance |
What to weigh before you borrow
- Your current rate. Compare the blended cost of keeping your first mortgage plus a second lien against refinancing everything.
- Fixed vs. variable. A variable-rate HELOC offers flexibility; a fixed second mortgage or refinance offers predictability.
- Closing costs and fees. Look at the total cost, not just the rate. Ask about appraisal, origination, annual, and early-closure fees.
- How long you will stay. If you may sell in a few years, upfront costs matter more.
- Your home is the collateral. Missing payments on any loan secured by your home puts the home at risk. Borrow for purposes that strengthen your finances, and borrow only what you need.
- Debt consolidation with care. Rolling credit card balances into a home equity loan can lower your interest cost, but it turns unsecured debt into debt secured by your home. It works best paired with a plan to keep those balances from coming back.
- Taxes. Whether interest is deductible depends on how you use the money and your situation. Ask a tax professional.
Common smart uses for home equity
- Renovations and repairs that maintain or add value to the home
- Paying off higher-interest debt, with a plan to stay out of it
- A down payment on an investment property
- Large planned expenses, such as education costs
Every situation is different. Tell us what you are trying to do and we will walk through which option makes the most sense, including when the best answer is to leave your equity where it is.
Talk it through with an experienced lender.
Every situation is different. Get a straight answer on your numbers from MAPL Home Loans, Connecticut's hometown lender.