What is home equity?
Home equity is the portion of your home's value that you own outright. If your home is worth $500,000 and you owe $300,000 on the mortgage, you have $200,000 in equity. As you pay down your mortgage and as the home appreciates, your equity grows.
For most American homeowners, home equity is their largest source of wealth — often more than retirement accounts, investment portfolios, or any other asset. That makes the decisions about whether and how to tap that equity unusually consequential.
Ways to access home equity
There are four main ways to convert home equity into cash:
- HELOC (Home Equity Line of Credit): A revolving line of credit secured by your home, similar to a credit card backed by your house. You borrow as needed during a draw period, typically with variable interest rates.
- Home Equity Loan: A second mortgage that gives you a lump sum at closing, with a fixed interest rate and predictable monthly payments over a set term.
- Cash-Out Refinance: Replaces your existing mortgage with a larger one, giving you the difference in cash. Best when your existing rate is similar to or higher than current market rates.
- Reverse Mortgage: For homeowners 62+, allows access to equity without monthly payments. Specialized product with significant tradeoffs.
The right choice depends on three main factors: how much you need, how flexible you want to be about timing, and what your existing mortgage rate looks like. Each option has very different math.
The biggest mistake people make
The most common (and most expensive) mistake homeowners make with home equity products is touching a low-rate primary mortgage when they don't need to. If you have a 3% mortgage from 2021 and you do a cash-out refinance to access equity, you're giving up that 3% rate on your entire mortgage balance to access cash at today's rates — usually 7%+. The extra interest you'll pay over the life of the loan often dwarfs the cash you actually pulled out.
For homeowners with sub-4% mortgages, a HELOC or home equity loan almost always makes more sense than a cash-out refinance. You preserve your low rate on the main mortgage and only pay current rates on the smaller piece you actually need.
Guides in this topic
The HELOC complete guide below is the foundational resource. We're working on additional guides covering home equity loans specifically and how to choose between the various equity-access options.
Related from other topics
While you're researching home equity, these refinance guides may also be relevant since they cover overlapping territory:
More home equity topics coming
We're working on additional guides covering home equity loans (the fixed-rate alternative to HELOCs), best uses for home equity, and how to determine how much equity you have. Let us know what you'd like us to cover next.