Many homeowners in Scottsdale are sitting on more equity than they realize. Equity is the difference between what your home is worth and what you still owe on it, and you can often borrow against it for renovations, education, debt consolidation, an emergency fund or an investment property down payment. There are three common ways to do it: a cash-out refinance, a home equity line of credit (HELOC) and a home equity loan. Bethany Sanchez (NMLS #2425491) at Sunset Home Lending explains how each works so you can pick the one that fits your goal, not just the one that is easiest to advertise.
Important: Your home secures every one of these loans. If you cannot repay, you could lose your home. Borrow only what you need, compare more than one option, and talk with a tax professional about deductibility. This page is educational and is not a commitment to lend.
Want numbers first? The HELOC and home equity loan quick quote shows estimated 30, 20 and 15-year options for your home in about a minute, with no name or credit check. As a wholesale broker, Sunset Home Lending compares second-mortgage lenders for your scenario, so you are not limited to one bank’s product.
How much equity can you use?
Lenders limit borrowing with a combined loan-to-value ratio (CLTV), which compares all loans secured by the home against its value. Here is an illustration with made-up numbers:
| Item | Amount |
|---|---|
| Estimated home value | $450,000 |
| Current mortgage balance | $270,000 |
| Equity | $180,000 |
| Maximum CLTV in this example | 80% |
| Maximum total loans at 80% | $360,000 |
| Potentially available | $360,000 − $270,000 = $90,000 |
Your actual limit depends on the appraised value, your credit and income, the type of property, occupancy and the program. Borrowing the maximum is rarely wise. Leave a cushion in case values fall or your income changes.
Three ways to use your equity
| Topic | Cash-out refinance | HELOC | Home equity loan |
|---|---|---|---|
| What it is | A new first mortgage that replaces your current one and gives you cash | A revolving line of credit secured by your home | A fixed lump-sum second loan |
| Your existing mortgage | Paid off and replaced | Stays in place | Stays in place |
| Rate type | Fixed or adjustable | Usually variable | Usually fixed |
| Payments | Principal and interest on the whole new loan | Often interest-only during the draw period, then principal and interest | Fixed principal and interest |
| Closing costs | Similar to a purchase loan | Often lower | Moderate |
| Best for | Large, one-time needs, or when a new first mortgage also improves your terms | Ongoing or uncertain expenses, such as a multi-phase renovation | A known, one-time expense with a payment you want to be predictable |
| Watch out for | A new rate on your entire balance and a reset loan term | Rate and payment changes, and lenders can freeze or reduce lines | A second payment and closing costs |
Cash-out refinance
With a cash-out refinance, you take a new first mortgage for more than you owe, pay off the old one and receive the difference in cash. It can make sense if you need a large sum and the new loan terms are as good as or better than what you have now, or if you want to restructure your mortgage at the same time. If your current mortgage has terms you like, refinancing the entire balance to access a smaller amount may cost more than a second loan.
HELOC
A HELOC works like a credit line. During the draw period, often around ten years, you can borrow, repay and borrow again up to your limit. Payments during the draw period may be interest-only, which keeps them low but does not reduce your balance. When the draw period ends, the repayment period begins and your payment rises because you start repaying principal. Because HELOC rates are usually variable and tied to a market index, your payment can change over time.
Home equity loan
A home equity loan, sometimes called a second mortgage, pays out a lump sum at closing and repays it with fixed payments over a set term. The predictability is the main benefit. It works well when you know exactly how much you need, such as for a finished project with a firm quote.
How to choose
Ask yourself these questions:
- How much do I need, and when? A single large amount favors a home equity loan or cash-out refinance. Ongoing expenses favor a HELOC.
- Do I want to keep my current first mortgage? If your existing rate and terms are favorable, a second loan or HELOC may protect them.
- Do I want fixed or variable payments? If you value stability, a fixed-rate option may be more comfortable. If you can handle changes, a HELOC offers flexibility.
- How long will I take to repay? Short-term needs may favor a HELOC you can pay off quickly. Long-term needs may favor a fixed loan.
- What will it cost? Compare closing costs, annual fees, rate adjustments and any early closure fees across options.
- What if my situation changes? Consider what happens if rates rise, your income drops or home values fall.
Smart uses and risky uses
Borrowing against your home tends to work best when the money improves your financial position or your home’s value, for example:
- Renovations that add value or fix important problems
- Replacing high-interest debt with a lower-cost, disciplined repayment plan
- Funding a down payment on a second property with a well-built plan
It tends to work worst when it funds ongoing spending, speculative investments or lifestyle upgrades you could not otherwise afford. Debt consolidation deserves special care: moving unsecured debt into a loan secured by your home can lower your payment, but it also puts your home at risk, and it will not help if the spending that created the debt continues.
What it costs
Depending on the product, you may pay:
- Lender or origination fees
- Appraisal or valuation fees
- Title search and title insurance
- Credit report fees
- Recording fees and transfer taxes
- Annual or maintenance fees on a HELOC
- Early closure fees if you close a HELOC too soon
Request a Loan Estimate or the equivalent written disclosure from every lender so you can compare apples to apples.
Your right to cancel
For many refinances and home equity loans secured by your primary residence, federal law gives you three business days after signing to cancel without penalty. Funds are normally held until that period expires. We explain your specific rights at closing.
Tax considerations
Whether interest on a home equity loan or HELOC is deductible depends on how you use the funds and on current tax rules. Sunset Home Lending does not give tax advice, and you should talk to a qualified tax professional before you make decisions based on a potential deduction.
The process and documents
Expect to provide:
- Government-issued photo ID
- Recent pay stubs, W-2s or tax returns, depending on your income type
- Two months of bank statements
- A recent mortgage statement, homeowners insurance and property tax information
- Information about debts you plan to pay off
The lender orders a valuation, reviews your file, and issues a final approval. After the right to cancel expires, the funds are released.
Talk to Bethany before you borrow
Contact Bethany Sanchez or call or text (760) 713-3814 to compare options for your home. She will walk through the numbers, show you what each option costs, and tell you honestly if it is better to wait or to choose a different path. If you are 62 or older, compare a reverse mortgage as well; if you are buying your next home before selling this one, see bridge loans; and if you own an investment property, read about investor financing.
Frequently asked questions
What is the difference between a HELOC and a home equity loan?
A home equity loan gives you one lump sum with a fixed payment schedule, while a HELOC is a revolving line of credit you can draw from as needed during a draw period. Home equity loans usually have fixed rates and predictable payments, and HELOCs usually have variable rates and flexible access.
How much equity can I borrow against?
Most lenders let you borrow up to a combined loan-to-value (CLTV) limit, often around 80% to 85% of your home's value for a primary residence, minus what you still owe on your first mortgage. Your limit depends on your credit, income, property type and the lender's guidelines.
Should I do a cash-out refinance or a HELOC if my current mortgage rate is low?
If your current first mortgage has terms you want to keep, a HELOC or home equity loan usually lets you borrow without replacing that mortgage. A cash-out refinance replaces your first mortgage with a new loan, so the new rate and terms apply to your entire balance. Compare the total cost of each option before you decide.
Is home equity loan interest tax deductible?
It can be, but only in certain situations. In general, the deduction depends on how you use the money (for example, to buy, build or substantially improve the home that secures the loan) and on tax limits. Talk to a qualified tax advisor, because Sunset Home Lending cannot give tax advice.
What credit score do I need for a HELOC or home equity loan?
Requirements vary by lender and program, and a higher score generally improves your options. Lenders also look at your debt-to-income ratio, your combined loan-to-value ratio and your payment history. Contact us to review where you stand before you apply.
How long does it take to get a home equity loan or HELOC?
Timelines vary with the lender, the type of valuation and how quickly documents are provided. Many take several weeks from application to funding, and refinances often take as long as a purchase loan. Because a federal right to cancel often applies to loans secured by your primary home, funds typically are not released until that period ends.
Can I take equity out of an investment property?
Yes, but the options differ. Some lenders offer cash-out refinance programs on rental properties, including DSCR cash-out loans, while HELOCs on investment properties are less common. Requirements for credit, reserves and loan-to-value are usually stricter than for a primary residence.
What are the risks of borrowing against my home?
Your home secures the loan, so if you cannot make payments, you could lose the home to foreclosure. Variable rates can raise your payment, closing costs can reduce what you net, and borrowing too much can limit your options if home prices fall. Borrow only what you need and have a plan to repay it.