What Is Home Equity?

Home equity is the portion of your property you truly own — the value of your home minus what you still owe on your mortgage.

Example:

• Your home is worth $100,000

• You still owe $50,000

• Your equity = $50,000

Equity grows as:

• You pay down your mortgage, and

• Your home value increases over time

However, you can’t borrow 100% of your home’s value. Most cash-out programs allow you to access 80–90% of your home’s total value, depending on your loan type and lender guidelines.

You must already have built a certain amount of equity before you can qualify — you can’t take a new mortgage and immediately pull all the cash out. Lenders want to see that you’ve established ownership and have made consistent payments.

Benefits of a Cash-Out Refinance

Many homeowners choose a cash-out refinance because it can help them get ahead during key financial moments. Common benefits include:

✔ A lump-sum payout

Useful for tackling big expenses such as home renovations, medical bills, or consolidating debt.

✔ Paying off high-interest credit cards

Using cash-out funds to eliminate revolving debt can save thousands in interest and simplify your finances.

✔ Potential credit score improvement

Lowering credit card balances and consolidating smaller loans can improve your credit profile — as long as you use the funds responsibly.

✔ Possible mortgage interest deduction

If the cash is used to build, buy, or significantly improve your home, some borrowers may qualify for mortgage interest tax deductions (consult a tax professional).

Potential Drawbacks

A cash-out refinance isn’t the right solution for everyone. Before proceeding, consider these possible downsides:

❌ Using secured debt to pay off unsecured debt

Paying off credit cards with home-secured debt can be risky. Falling behind on your mortgage puts your home at risk. This strategy should not become a habit — only consider it as part of a long-term financial plan.

❌ Mortgage insurance costs

If your new loan balance exceeds 80% of your home’s value, you may be required to pay mortgage insurance, adding 0.55%–2.25% per year.

❌ The temptation to overspend

Some homeowners pay off credit cards only to run them back up. If you're using a cash-out refinance to reset your financial situation, set a plan to avoid repeating past patterns.

❌ Closing costs

Just like any refinance, you’ll pay closing costs — usually 2% to 5% of the new loan amount.