Home Equity & Refinancing Guide: Cash-Out, HELOC & HELOAN [2026]

Understanding Home Equity: The Foundation

Home equity is the difference between your home's current market value and what you owe on your mortgage. It's the portion of your home you truly "own."

How to Calculate Your Equity

Usable vs Total Equity

You typically can't access all your equity. Lenders require you to keep 10-20% equity in your home for protection. Your usable equity is what you can actually borrow against.

LTV and CLTV Explained

• LTV (Loan-to-Value): Your first mortgage divided by home value
• CLTV (Combined Loan-to-Value): All loans against your home divided by value

Most lenders cap CLTV at 80-90%, meaning total debt can't exceed 80-90% of your home's value.

Three Ways to Access Your Home Equity

Cash-Out Refinance: Complete Guide

A cash-out refinance replaces your existing mortgage with a new, larger loan—giving you the difference in cash. It's ideal when you need a large lump sum and can also improve your interest rate.

How Cash-Out Refinance Works

1. Your existing mortgage is paid off
2. A new, larger mortgage is created
3. You receive the difference as cash
4. You make payments on the new loan

Cash-Out Refinance Requirements 2026

• Credit Score: 620+ for conventional (680+ for best rates)
• Equity: At least 20% remaining after cash-out
• DTI Ratio: Generally below 43-45%
• Seasoning: 6+ months since purchase for most lenders

Pros of Cash-Out Refinance

• Single payment (replaces first mortgage)
• Fixed rate provides payment stability
• May lower your overall interest rate
• Large amounts available
• Interest may be tax deductible for home improvements

Cons of Cash-Out Refinance

• Higher closing costs (2-5% of loan amount)
• Resets your mortgage term
• Gives up your current rate (bad if you have a low rate)
• Takes longer to close (30-45 days typically)

Learn more: Cash-Out Refinance Complete Guide

HELOC: Home Equity Line of Credit Guide

A HELOC provides revolving access to your home equity—similar to a credit card secured by your house. You only pay interest on what you borrow, and you can draw and repay repeatedly during the draw period.

HELOC Structure

• Draw Period (typically 10 years): Access funds as needed, interest-only payments
• Repayment Period (typically 20 years): No more draws, pay principal + interest

HELOC Interest Rates

HELOCs have variable rates, typically tied to the Prime Rate plus a margin. Your rate will change as the Prime Rate changes.

HELOC Requirements 2026

• Credit Score: 620-680+ depending on lender
• Equity: 15-20% minimum remaining
• DTI Ratio: Generally below 43%
• Income Documentation: Tax returns, pay stubs, bank statements

Pros of HELOC

• Flexible access—borrow only what you need
• Lower closing costs than cash-out refinance
• Keeps your first mortgage intact
• Interest-only payments during draw period
• Pay down and re-draw as needed

Cons of HELOC

• Variable rate means payment uncertainty
• Payment shock when repayment period begins
• Credit line can be frozen if home values drop
• Second lien position

Learn more: How Does a HELOC Work?

HELOAN: Home Equity Loan Guide

A home equity loan (HELOAN) provides a fixed lump sum with a fixed interest rate and fixed monthly payments. It's a second mortgage with predictable payments.

How HELOAN Works

• Receive entire amount at closing
• Fixed rate locks in for loan term
• Fixed monthly payments from day one
• Typical terms: 5-30 years

HELOAN Requirements 2026

• Credit Score: 620-680+ depending on lender
• Equity: 15-20% minimum remaining
• DTI Ratio: Generally below 43%
• Income Documentation: Similar to HELOC

Pros of HELOAN

• Fixed rate = predictable payments
• Lower closing costs than cash-out refi
• Keeps first mortgage intact
• Clear payoff timeline

Cons of HELOAN

• Less flexible than HELOC (no re-draw)
• Full payment from day one (no interest-only option)
• May have higher rate than HELOC initially
• Second lien position

Learn more: Home Equity Loan Guide

HELOC vs HELOAN vs Cash-Out: Complete Comparison

Decision Framework

Choose Cash-Out Refinance when:

• You can lower your current mortgage rate
• You need a large lump sum
• You want one simple payment
• You're okay resetting your mortgage term

Choose HELOC when:

• You have a great rate on your first mortgage you want to keep
• You have ongoing or uncertain expenses
• You want flexibility to draw as needed
• You can handle variable rate risk

Choose HELOAN when:

• You want to keep your first mortgage rate
• You know exactly how much you need
• You want predictable fixed payments
• You prefer simplicity over flexibility

Learn more: HELOC vs Cash-Out Refinance | HELOC vs Home Equity Loan

Best Uses for Home Equity

Recommended Uses

1. Home Improvements/Renovations

   Adds value back to your home, and interest may be tax deductible. Kitchen remodels, bathroom updates, and additions are popular choices.

2. Debt Consolidation

   Pay off high-interest credit cards or personal loans. Home equity rates are typically much lower than credit card rates.

3. Emergency Fund/Financial Safety Net

   A HELOC can serve as a backup emergency fund—you only pay interest if you use it.

4. Education Expenses

   May offer lower rates than private student loans, though federal loans often have better protections.

5. Investment Opportunities

   Some use equity for investment property down payments or business investments (higher risk).

What NOT to Use Home Equity For

• Vacations or luxury items: Don't borrow against your home for depreciating assets
• Risky investments: Your home is collateral—be cautious
• Regular living expenses: This indicates a budget problem, not an equity opportunity
• Paying minimum payments elsewhere: Address the root spending issue first

Learn more: Best Uses for Home Equity

Risks of Tapping Home Equity

Before accessing your equity, understand these risks:

Your Home Is Collateral

Unlike credit cards or personal loans, home equity products use your home as collateral. If you can't make payments, you could face foreclosure.

Market Value Fluctuations

If home values drop, you could end up "underwater" owing more than your home is worth. This limits your options to sell or refinance.

Interest Rate Risk (HELOC)

Variable rates can rise significantly. A HELOC payment could increase substantially if rates climb.

Over-Leveraging

Taking too much equity reduces your financial cushion and flexibility. Maintain adequate equity for market fluctuations.

Home Equity for Seniors: Special Considerations

Seniors 62+ have an additional option: the reverse mortgage. Here's how it compares:

Learn more: Complete Reverse Mortgage Guide | Reverse Mortgage vs HELOC for Seniors

Frequently Asked Questions

How much equity do I need for a HELOC?

Most lenders require at least 15-20% equity remaining in your home after the HELOC. For example, if your home is worth $500,000 and you want to maintain 20% equity, your total debt (mortgage + HELOC) can't exceed $400,000.

Can I get a HELOC with bad credit?

HELOC credit requirements vary by lender. Most require a minimum score of 620-680, but some wholesale lenders offer programs for borrowers with lower scores. Higher equity and lower debt-to-income ratios can offset credit challenges.

Is HELOC interest tax deductible?

HELOC interest may be tax deductible if the funds are used to buy, build, or substantially improve your home. Interest on funds used for other purposes (debt consolidation, education, etc.) is generally not deductible. Consult a tax advisor for your specific situation.

How long does it take to get a HELOC?

A HELOC typically takes 2-6 weeks from application to closing, depending on the lender and complexity. Working with a mortgage broker can often expedite the process.

Can I pay off my HELOC early?

Yes, most HELOCs allow early payoff without penalty. You can pay down the balance at any time and then draw again during the draw period.

What happens if my home value drops?

If your home value drops significantly, your lender may freeze or reduce your HELOC credit line. You'd still owe any balance you've drawn, but you may not be able to access additional funds.

Can I have a HELOC and a home equity loan?

Yes, you can have both simultaneously, provided you have sufficient equity. The combined loan-to-value (CLTV) typically can't exceed 80-90%.

How does a HELOC affect my credit score?

Opening a HELOC may initially cause a small dip due to the hard inquiry and new account. However, maintaining low utilization can actually help your credit score over time.

Next Steps: Find Your Best Equity Option

Choosing between cash-out refinance, HELOC, and HELOAN depends on your specific situation. Mo Abdel at Lumin Lending can help you compare options and find the best solution for accessing your California or Washington home equity.