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Home equity financing lets a homeowner borrow against the equity in their property. The term can refer broadly to several types of home equity borrowing, including a fixed-rate home equity loan, a home equity line of credit (HELOC), and a cash-out refinance.
The answer to what types of home equity financing are available generally includes these three options:
• Fixed-rate home equity loan: Provides a lump sum with a fixed interest rate and predictable payments.
• HELOC: Provides a revolving line of credit that the borrower can use as needed, usually at a variable interest rate.
• Cash-out refinance: Replaces the existing mortgage with a larger mortgage and gives the borrower the difference in cash.
The right choice depends on the amount and timing of the cash needed, the borrower’s current mortgage interest rate, comfort with payment changes, and total borrowing costs.
Key Points
• Home equity financing uses the home as collateral.
• A fixed-rate home equity loan provides one lump sum and fixed monthly payments.
• A HELOC provides access to funds over time. The borrower pays interest on the amount used, not the full credit limit.
• A cash-out refinance replaces the existing mortgage with a new, larger mortgage.
• A home equity loan or HELOC lets a borrower keep a low mortgage interest rate. A cash-out refinance changes the terms of the existing mortgage.
• Lenders commonly review equity, credit history, income, debt-to-income ratio, payment history, and other financial information.
• Failing to repay a home equity loan, HELOC, or cash-out refinance can put the home at risk of foreclosure.
How the Three Options Compare
A home equity loan and a HELOC are additional loans on top of your mortgage loan that are secured by the home. A cash-out refinance replaces the current mortgage with a new loan.
| Feature | Fixed-rate home equity loan | HELOC | Cash-out refinance |
|---|---|---|---|
| Access to funds | One lump sum | Withdrawals as needed up to a credit limit | One lump sum from a new mortgage |
| Interest rate | Usually fixed | Usually variable, although some products may offer fixed-rate conversion options | Usually fixed or adjustable, depending on the new mortgage |
| Payments | Fixed principal-and-interest payments | Payments can change based on the balance and interest rate | Payments follow the terms of the new mortgage |
| Draw period | None | Usually a set draw period, often 10 years | None |
| Existing mortgage | Stays in place | Stays in place | Replaced by the new mortgage |
| Number of mortgage- related payments | Existing mortgage plus home equity loan payment | Existing mortgage plus HELOC payment | Usually one new mortgage payment |
| Common use | One-time, known expense | Ongoing or uncertain expenses | Large cash need when refinancing also makes financial sense |
| Main risk | The home secures the loan | The home secures the line, and payments may change | The home secures the larger replacement mortgage |
Home Equity Loan vs HELOC
The difference between a home equity loan and a line of credit is the way the borrower receives and repays the funds:
• A home equity loan provides the full approved amount at closing. The borrower typically makes equal monthly payments at a fixed interest rate.
• A HELOC provides a credit limit. The borrower can withdraw money during the draw period and generally pays only interest on the outstanding balance.
A home equity loan may suit a borrower who knows the exact amount needed and wants predictable payments. A HELOC may suit a borrower whose costs will occur over time or remain uncertain.
Refinance vs Home Equity Loan
The difference between a refinance and a home equity loan is what happens to the existing mortgage:
• A home equity loan is a second loan. The borrower keeps the current mortgage and adds a separate payment.
• A cash-out refinance pays off the current mortgage and replaces it with a new, larger mortgage. The borrower receives the difference between the new loan amount and the old mortgage balance in cash.
A home equity loan may be preferable when the existing mortgage has a low interest rate. A cash-out refinance may make sense when the borrower wants one mortgage payment and can qualify for a lower interest rate.
Cash-Out Refinance vs Home Equity Loan
A cash-out refinance and a home equity loan both provide a lump sum secured by the home. Their interest rate, payment, and closing-cost structures can differ:
• A cash-out refinance offers one consolidated mortgage payment and usually a longer repayment term.
• A home equity loan leaves the existing mortgage unchanged but creates a second payment.
• A cash-out refinance may be more attractive when the borrower can qualify for a lower interest rate.
• A home equity loan avoids replacing a low-rate first mortgage, but the second loan will have a different interest rate, fees, and repayment term.
When deciding between the two options, compare your new mortgage payment, existing mortgage payment, home equity loan payment, closing costs, and total interest over the full repayment period.
How Much Can a Homeowner Borrow?
The amount available usually depends on the home’s value, the current mortgage balance, the requested loan amount, credit history, income, and the lender’s maximum combined loan-to-value ratio.
Calculating CLTV
Combined loan-to-value ratio, or CLTV, compares all loans secured by the home with the property’s appraised value:
CLTV = (Current mortgage balance + New loan or line amount / Appraised home value) x 100
Many lenders set a maximum CLTV, often up to 85%, although the limit depends on the lender, equity borrowing option, property, and borrower. A home equity loan calculator can help estimate potential borrowing capacity. It works similarly to the home affordability calculator used during the home-buying process.
Fixed-Rate Home Equity Loans
A fixed-rate home equity loan provides a lump-sum payment that the borrower repays over a set period. The interest rate and scheduled principal-and-interest payment generally remain the same for the life of the loan.
This structure answers the question how do home equity loans work differently from HELOCs: The home equity loan funds the entire amount at closing, while the HELOC allows multiple withdrawals during its draw period.
Fixed-rate home equity loans often have terms ranging from five to 30 years. The loan usually must be paid in full if the home is sold.
Home Equity Loan Example
Suppose a borrower needs $24,000 for a $20,000 garage addition and a $4,000 medical bill. A $24,000 home equity loan would provide the full amount upfront. The borrower would then make scheduled monthly payments until the balance is repaid.
A fixed-rate home equity loan may be suitable for:
• A renovation with a known price
• Debt consolidation
• A major one-time expense
• A borrower who wants predictable monthly payments
• A homeowner who wants to keep their current mortgage with a low interest rate
The borrower should ask lenders about closing costs, appraisal fees, and other third-party charges before accepting an offer.
Recommended: What Is a Fixed-Rate Mortgage?
HELOCs
A HELOC is revolving debt, much like a credit card. The lender approves a credit limit, and the borrower can withdraw funds as needed during the draw period. As the borrower repays principal, that amount generally becomes available again.
Draw and Repayment Periods
A HELOC usually has two stages:
• Draw period: The borrower can access funds up to the credit limit. This commonly lasts 10 years. (The draw period for a SoFi heloc is 3 years.)
• Repayment period: The borrower can no longer withdraw funds and repays the outstanding balance over a specified period.
For example, a 30-year HELOC could have a 10-year draw period followed by a 20-year repayment period. Depending on the agreement, the borrower may make interest-only payments during the draw period or payments toward both principal and interest.
HELOC Example
Suppose a borrower has a $10,000 HELOC and initially withdraws $7,000. The borrower has $3,000 of available credit. If the borrower pays $5,000 toward the principal, the available credit may increase to $8,000 during the draw period.
A HELOC may suit a borrower who needs money for an ongoing project, such as home improvements. Other potential uses include education expenses, wedding costs, and business startup costs.
How HELOC Interest Rates Work
A HELOC generally has a variable interest rate that can change with market conditions. The monthly payment can change when the interest rate changes or when the balance changes.
During the draw period, the borrower pays interest on the amount withdrawn. During repayment, the borrower pays principal and interest on the balance and typically cannot withdraw additional funds.
A HELOC interest-only calculator can help you compare interest-only payments with payments that reduce the principal balance.
Cash-Out Refinancing
Mortgage refinancing replaces an existing mortgage with a new loan. A cash-out refinance increases the new mortgage balance above the amount owed on the current mortgage and provides the difference to the borrower in cash. More information about the mechanics appears in How Cash-Out Refinancing Works.
Cash-Out Refinancing Example
Suppose a home is appraised at $400,000 and the homeowner owes $200,000 on the mortgage. If the homeowner needs $30,000 for repairs, a cash-out refinance could replace the current mortgage with a $230,000 mortgage, subject to lender approval and applicable costs. The borrower would receive the $30,000 difference in cash.
A cash-out refinance may suit someone who:
• Needs a large lump sum
• Wants one consolidated mortgage payment
• Believes the new mortgage interest rate or repayment term would be better than the current one
• Has enough equity and income to qualify for the larger mortgage
Common refinancing goals include:
• Securing a lower interest rate
• Changing the repayment term
• Lowering the monthly payment
• Accessing cash for a major expense
A longer repayment term can lower the monthly payment while increasing total interest over the life of the loan. A cash-out refinance also has closing costs and may have higher upfront costs than a home equity loan.
Advantages and Disadvantages
Potential cash-out refi advantages:
• Provides a lump sum of cash
• May provide a lower mortgage interest rate
• Can change the repayment term
• Usually creates one mortgage payment
Potential cash-out refi disadvantages:
• Replaces the existing mortgage
• May eliminate a favorable current interest rate
• Adds debt secured by the home
• Requires closing costs
• May increase total interest or extend the repayment period
Fees, Rates, and Tax Considerations
Home equity loans and HELOCs may include closing costs and fees. These costs can range from 1% to 5% of the loan amount, although the amount and structure vary by lender and product.
HELOCs may have ongoing charges such as:
• Annual fees
• Transaction fees
• Inactivity fees
A lender generally provides disclosures for certain fees, including application fees, discount points, annual account fees, and transaction fees. Borrowers should ask about other charges, such as returned-payment fees, before signing the agreement. The Consumer Financial Protection Bureau provides a loan estimate explainer to help borrowers review loan terms and fees.
Comparing Interest Rates
Home equity loan interest rates are often lower than rates for unsecured borrowing because the home secures the debt. The rate may still differ from the borrower’s first-mortgage rate, personal loan rate, credit card rate, or HELOC rate.
When comparing rates, make sure you review:
• The APR, or annual percentage rate, which includes the interest rate plus lender fees
• Whether the interest rate is fixed or variable
• The length of the repayment term
• The total interest over the loan term
• Closing costs and recurring fees
A lower interest rate does not always produce the lowest total cost if it comes with higher fees or a longer repayment period. Current market conditions, the borrower’s credit profile, the CLTV, and the loan type all affect the offer. Borrowers can review current home equity loan rates when beginning the comparison.
Tax Treatment
Interest on a home equity loan or HELOC may be deductible when the borrowed funds are used to buy, build, or substantially improve the home securing the loan. Tax treatment depends on the borrower’s circumstances and applicable tax rules. A tax professional can explain how the loan may affect a specific tax return.
Comparing Offers
To compare home equity loan offers from different lenders, borrowers should review the full cost and payment structure rather than comparing the advertised interest rate alone.
A useful checklist includes:
1. Compare APR and interest rate. The APR includes certain fees beyond the stated interest rate and can help you understand the full cost of borrowing.
2. Review fixed versus variable rates. A fixed-rate home equity loan provides more predictable payments. A variable-rate HELOC can change over time.
3. Add all fees. Include origination fees, appraisal charges, application fees, annual fees, transaction fees, and closing costs.
4. Check the loan amount and CLTV limit. Confirm that the lender’s maximum borrowing amount meets your needs.
5. Compare repayment terms. A longer term may reduce the monthly payment but increase total interest.
6. Review HELOC payments. Check the payment during the draw period and the expected payment during repayment.
7. Ask about penalties and recurring charges. Review prepayment terms, annual fees, and inactivity fees.
8. Consider the existing mortgage. A home equity loan or HELOC leaves the first mortgage in place. A cash-out refinance replaces it.
9. Compare total repayment costs. Calculate the interest and fees over the expected time the debt will remain outstanding.
10. Confirm how payments are calculated. Ask whether payments include principal and interest, and whether a HELOC payment can change.
The lender’s interest rate quote, loan estimate, or comparable disclosure should provide the figures needed for this review. Borrowers should ask each lender for the same loan amount and repayment term to make offers easier to compare.
Qualification Requirements
Lenders typically review the borrower’s equity, credit profile, income, debts, and payment history. Requirements vary by lender and type of home equity product.
An application may require:
• Proof of income, such as pay stubs, tax returns, or bank statements
• Information about the existing mortgage and other debts
• Permission to review your credit history and credit score
• Documentation of homeowners insurance
• Property details and an appraisal or other valuation
• Evidence of a reliable repayment capacity
• Information about your payment history and recent delinquencies
Many lenders look for at least 20% equity after accounting for the new loan, a credit score of at least 620, and a debt-to-income ratio no higher than 43%. These figures are general benchmarks, not universal requirements. A lender may apply different standards based on the loan type, property, your income, credit history, and CLTV.
The borrower’s home secures the debt. If the borrower cannot make the required payments, the lender could begin foreclosure proceedings.
Recommended: How Does a HELOC Affect Your Credit Score?
Choosing an Option
A fixed-rate home equity loan may make sense when:
• The borrower needs a known amount upfront.
• The current mortgage interest rate is low.
• Predictable payments fit your budget.
• The expense is one-time or has a defined cost.
Potential uses include consolidating high-interest debt, paying for a major renovation, or covering a large purchase.
A HELOC may be appropriate when:
• The borrower needs funds over multiple stages.
• The total cost is uncertain.
• The borrower wants to withdraw only what is needed.
• The borrower can manage a variable rate and changing payments.
A cash-out refinance may be worth considering when:
• The borrower needs a large lump sum.
• The existing mortgage interest rate is high.
• The new mortgage rate and term may improve your financial profile.
• One consolidated mortgage payment is a priority.
Before choosing, the borrower should compare the new debt with the existing mortgage and assess whether the monthly payments remain affordable if rates or expenses change.
The Takeaway
The three main types of home equity financing are:
1. Fixed-rate home equity loans
2. Home equity lines of credit (HELOCs)
3. Cash-out refinances
A fixed-rate home equity loan provides one lump sum with predictable payments. A HELOC provides flexible access to funds, but the interest rate and payment amount can change. A cash-out refinance replaces the current mortgage with a larger mortgage and provides cash from the difference.
All three options use the home as collateral. The borrower should compare the APR, fees, repayment term, payment structure, CLTV, and total repayment cost before applying.
SoFi offers both home equity loans and home equity lines of credit (HELOCs) to help you leverage your home's value. Access up to 85% of your equity (up to $750,000), to fund renovations, consolidate high-interest debt, or cover significant expenses. Both options offer competitive rates compared to other loan types. Plus, you’ll be paired with a dedicated SoFi Mortgage Loan Officer who can help you find the right fit for your needs.FAQ
What is the downside of a home equity loan?
The primary downside is that the home secures the debt. If the borrower cannot make the payments, the lender could pursue foreclosure. A home equity loan also provides a lump sum. Borrowers who are unsure how much they need may prefer the flexibility of a HELOC, provided they can manage a variable interest rate and changing payments.
How much does a $50,000 home equity loan cost?
The exact cost depends on the interest rate, loan term, fees, and lender. For example, a $50,000 loan at a 7.50% interest rate with a 10-year repayment term would have an estimated monthly payment of $594 and total interest of $21,221 over the life of the loan, before fees.
Can you use a home equity loan for anything?
A home equity loan can typically be used for many purposes. Common uses include:
• Consolidating higher-interest debt
• Paying medical bills
• Funding major home repairs or upgrades
• Covering a large purchase
Because the home is collateral, the intended use should justify the risk and repayment cost.
How do I qualify for a home equity loan?
A borrower generally needs sufficient home equity, acceptable credit, manageable debt, reliable income, and a history of making payments on time. The lender may also review your:
• Credit score and credit report
• Debt-to-income ratio
• Mortgage balance and CLTV
• Proof of income
• Homeowners insurance
• Property value
• Recent payment history
Requirements vary by lender. A borrower should confirm the lender’s minimum equity, credit score, income, and debt-to-income ratio requirements before applying.
What is the difference between a HELOC and a cash-out refinance?
A HELOC is a revolving line, similar to a credit card, that is secured by your home. The borrower can withdraw funds up to a set limit during the draw period, then repay the outstanding balance during the repayment period. The existing mortgage remains in place.
A cash-out refinance replaces the existing mortgage with a new mortgage for more than the borrower currently owes. The borrower receives the difference as a lump-sum cash payment and repays the new mortgage under its terms.
This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.
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