Home equity: HELOC, cash-out refinance, or leave it alone

Equity is the difference between what your home is worth and what you owe. It is real wealth and it is also completely illiquid: it does nothing, earns nothing, and cannot be spent without either borrowing against it or selling.

What you can actually borrow

Not your equity. Lenders cap the total borrowing against a property, usually at 80% of value, sometimes 85% or 90% at a higher rate. So the calculation is 80% of value minus your existing balance, which is always less than your equity, and the gap surprises people.

On a property worth $500,000 with $300,000 owed, equity is $200,000 but borrowing capacity at 80% is $100,000. The other $100,000 is the lender's cushion, and it exists because they are the ones who lose if prices fall.

The four routes

Home equity line of credit

A revolving facility secured on the property. Draw what you need, pay interest on the drawn balance. Usually a variable rate, often with an interest-only draw period followed by a repayment period where the payment jumps.

Suits: unknown or staged costs, like a renovation where the final bill is uncertain. Watch: the payment shock when the draw period ends, and that a variable rate is a real risk over a decade.

Home equity loan, or a second charge in the UK

A fixed lump sum at a fixed rate over a fixed term, sitting behind your main mortgage.

Suits: a known one-off cost where you want payment certainty. Watch: the rate is higher than a first mortgage because the lender is second in line if things go wrong.

Cash-out refinance, or further advance in the UK

Replace the existing mortgage with a larger one and take the difference in cash.

Suits: the case where current rates are at or below your existing rate, so you can borrow more without repricing what you already owe. Watch: if your existing rate is well below current rates, this is expensive in a way the paperwork does not spell out, because you are repricing your entire balance to get at a slice of equity. Compare against a second charge before doing it.

Sell

The only route that converts equity to cash without adding debt. Costs are transaction costs and disruption rather than interest.

The case for doing nothing

Every route above turns an asset into a liability secured against the roof over your head. The interest is usually lower than unsecured borrowing, which is exactly why it is easy to talk yourself into, and the consequence of not paying is categorically worse. Unsecured default damages your credit. Secured default takes the house.

Borrowing against equity makes sense for things that either increase the value of the asset or are genuinely unavoidable. It makes much less sense for consumption, and consolidating credit card debt into a mortgage without changing what caused the debt is how people end up doing it twice.

Before you apply

• Get the valuation right. Everything follows from it, and lenders use their own. If your estimate is optimistic, your borrowing capacity is smaller than you think.
• Check whether you have crossed 20% equity. If you are paying mortgage insurance and appreciation has taken you past the threshold, removing it may be worth more than the borrowing.
• Compare total cost, not rate. Fees, valuation costs and legal costs differ more between offers than rates do.
• Ask what happens at the end of the draw period on any line of credit, and get the number in writing.

Our equity calculator shows what you own outright and what conventional limits would let you borrow against it.