Refinancing and borrowing against your home

Your home is one of the largest assets you'll ever own, and over time—through mortgage payments and property appreciation—you build equity in it. Once you have equity, you have options: refinancing to change your loan terms, or tapping your equity through a cash-out refinance, home-equity loan, or HELOC (Home Equity Line of Credit). Each option carries different costs and risks, so understanding them is critical before you commit.

What Is Refinancing?

Refinancing means replacing your existing mortgage with a new loan. The new mortgage pays off the old one, and your home remains the collateral. Why refinance? The most common reasons are to lower your interest rate (if rates have dropped since you took out your original loan), shorten the loan term (pay off your home faster), or switch from an adjustable-rate mortgage to a fixed-rate one. You might also refinance to remove mortgage insurance or to access cash by borrowing against your equity.

The Cost of Refinancing: Closing Costs Matter

When you refinance, you pay closing costs—the fees for processing the new loan, appraisal, title insurance, and lender origination. These typically range from 2 to 5 percent of your loan amount. For example, on a $300,000 mortgage, closing costs might be $6,000 to $15,000. The average cost in 2024 was around $2,400, though this varies widely by state and lender. Title costs, local taxes, and recording fees differ by state, so your actual costs depend on where you live.

The key question is whether your savings will exceed these upfront costs. If you plan to stay in your home for several more years, the monthly savings from a lower rate may justify refinancing. But if you plan to sell or move soon, the closing costs might outweigh any benefit. Calculate your break-even point—the number of months it will take for your monthly savings to cover the closing costs—before applying.

Rate-and-Term vs. Cash-Out Refinance

A rate-and-term refinance simply replaces your loan with new terms; you borrow only what you still owe on the mortgage. A cash-out refinance lets you borrow more and receive the excess as a lump sum. For example, if you owe $200,000 on your mortgage and your home is worth $400,000, you have $200,000 in equity. With a cash-out refinance, you could take out a new loan for $250,000, pay off the old $200,000, and pocket $50,000 in cash. Many homeowners use cash-out refinancing for home repairs, education, or paying off higher-interest debt. Remember: you're still using your home as collateral, so treat borrowed cash carefully. If you can't repay, the lender can foreclose.

Home Equity Loans and HELOCs: Borrowing Against Your Home

If you don't want to refinance your primary mortgage, you can borrow against your home's equity through a home equity loan or HELOC. Both use your home as collateral—a second mortgage, in legal terms. Both carry the same core risk: if you don't repay, your lender can foreclose. They are not like credit cards or personal loans. Treat them with the seriousness they deserve.

Home Equity Loan

A home equity loan gives you a lump sum of cash upfront. You borrow a fixed amount and repay it with a fixed interest rate over a set term (typically 5 to 30 years). The monthly payment is predictable. Most lenders require you to have at least 15 to 20 percent equity in your home before you can qualify. Interest rates are often lower than credit cards or personal loans because your home secures the debt. However, closing costs (typically 2 to 5 percent of the loan amount) apply, just as with a primary mortgage refinance. Because a home equity loan is a second mortgage, interest rates are usually higher than your primary mortgage rate, reflecting the additional risk to the lender.

HELOC (Home Equity Line of Credit)

A HELOC is a revolving line of credit secured by your home, much like a credit card but with lower interest rates and a larger credit limit. During the draw period (typically 10 years), you can borrow and repay as needed, paying interest only on what you withdraw. After the draw period ends, the repayment period begins—usually 10 to 20 years—during which you can no longer borrow, only repay. The main trade-off is interest-rate risk: HELOCs typically have variable (adjustable) rates, meaning your monthly payment can change if market rates rise. This unpredictability can make budgeting harder than a fixed-rate home equity loan. However, HELOCs are flexible if you need ongoing access to cash for home improvements or other expenses over time.

Both home equity loans and HELOCs require a good credit score and income documentation. Lenders typically need a score of around 700 or higher. Your payslips, tax returns, and bank statements will be reviewed to confirm your ability to repay. For immigrant applicants or those with limited credit history, some lenders may accept an Individual Taxpayer Identification Number (ITIN) instead of a Social Security Number (SSN), though availability varies by lender and state.

Dropping Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) is insurance that protects the lender, not you, if you default. It is required on conventional mortgages when your down payment is less than 20 percent. PMI is rolled into your monthly payment and can add hundreds of dollars per year to your costs.

Once you reach 20 percent equity in your home (meaning the loan-to-value ratio falls to 80 percent), you can request that your lender cancel PMI. You must make the request in writing to your mortgage servicer and meet conditions: your loan must be current, and you generally cannot have been more than 30 days late in the last 12 months. You may need to pay for a home appraisal to confirm your home's current value. If you do not request cancellation, federal law requires your lender to automatically cancel PMI once your equity reaches 22 percent (loan balance reaches 78 percent of the original purchase price), but this can take years on a long-term mortgage. The sooner you request cancellation, the sooner you save.

Some homeowners refinance specifically to remove PMI without tapping equity. If rates are favorable, this can be worthwhile. However, refinancing resets your closing costs, so calculate whether the monthly PMI savings will cover those costs before refinancing.

Critical Risk: Your Home Is on the Line

Refinancing, cash-out refinancing, home equity loans, and HELOCs all put your home at risk if you stop paying. Unlike credit cards or personal loans, lenders can foreclose on your property to recover the debt. A foreclosure damages your credit score severely, can take months or years to resolve, and means losing your home and the equity you've built. It is far more serious than defaulting on other debts.

Before borrowing against your home, honestly assess whether you can afford the new payment alongside your other expenses. A job loss, medical emergency, or unexpected bill can disrupt your ability to pay. Never borrow more than you truly need, and do not use home equity for discretionary spending you could otherwise avoid.

What If You Cannot Afford Your Payments?

If you are struggling to make your mortgage or home equity payments, contact your mortgage servicer immediately. Do not wait until you miss a payment. Many servicers offer options such as loan modification (changing the terms to lower your monthly payment), forbearance (temporarily pausing payments), or a repayment plan. Servicers are required by law to explore options with you before moving toward foreclosure, but only if you reach out.

Simultaneously, contact a HUD-approved housing counselor. These counselors are trained and certified by the federal Department of Housing and Urban Development and provide free or very low-cost advice. They can help you understand your options, negotiate with your servicer, and create a realistic plan. They work in person or by phone and will review your full financial situation—income, expenses, assets, and debts—to identify the best path forward for you.

It is crucial to act early. Once you miss a payment, your options shrink and the process moves faster toward legal action. Each missed payment worsens your credit and makes recovery harder.

To find a HUD-approved housing counselor near you, use the CFPB's Find a Counselor tool at consumerfinance.gov/find-a-housing-counselor, call the CFPB at 855-411-CFPB (2372), call HUD's Housing Counseling Locator Service at 800-569-4287, or call the Homeowners Hope Hotline at 888-995-HOPE (4673)—open 24 hours a day, seven days a week. These services are free; do not pay anyone claiming to offer foreclosure help or loan modification services on your behalf.

Key Takeaways

• Refinancing replaces your mortgage; closing costs (2–5 percent) mean you must model whether monthly savings will cover upfront expenses.
• Cash-out refinancing, home equity loans, and HELOCs all let you borrow against your home's equity, but your home becomes collateral—treat them very differently from credit cards or personal loans.
• Once you reach roughly 20 percent equity, you can request PMI cancellation in writing rather than refinance to remove it.
• A home equity loan gives a fixed lump sum at a fixed rate; a HELOC offers flexibility but carries variable rate risk and unpredictable payments.
• If you are struggling with payments, contact your servicer and a HUD-approved housing counselor immediately (free)—options shrink with each missed month.