Two limits, and the lower one wins
Having equity is not the same as being able to borrow it. Lenders apply two independent tests, and you are capped by whichever binds first.
- Combined loan-to-value. Typically 85%, reaching about 90% for strong credit and dropping to 80% for thinner credit. On a $500,000 home with a $300,000 mortgage, an 85% cap leaves roughly $125,000.
- Debt-to-income. Most lenders want total debts under about 43% of gross income after the new payment. Equity-rich but income-light households — retirees especially — are frequently capped here rather than by equity, and paying down a car loan raises borrowing power faster than waiting for appreciation.
The cash-out trap
A cash-out refinance replaces your entire mortgage. If you hold a 3% or 4% rate from a few years ago, refinancing reprices the whole balance at today's rate — not just the cash you take out. On a $300,000 balance, moving from 4% to 6.75% costs hundreds a month before you have borrowed a dollar of new money. That single fact is why second liens have dominated since rates rose, and the calculator above prices it explicitly rather than leaving you to spot it.
Which product, and when
- HELOC — when you do not know the final amount, or will repay quickly. Cheapest if drawn and repaid fast, but the rate is variable and the payment jumps at the end of the draw period.
- Home equity loan — when the cost is known and you want certainty. Fixed rate and payment, but you pay interest on the whole sum from day one.
- Cash-out refinance — only when today's rate is at or below your current one, or you are taking out a very large sum relative to the balance.
One tax note: interest is only deductible when the funds buy, build, or substantially improve the home securing the loan. Consolidating credit cards or paying tuition does not qualify, even though the loan is secured by your house.
Related calculators
- Home Equity Calculator — how your equity grows over time
- HELOC Calculator — draw and repayment on an amount you have chosen
- HELOC vs Cash-Out Refinance
- ADU Cost & ROI Calculator — a common use for the money
- True Cost of Homeownership
- DTI Calculator
Behind the two gates this calculator applies is one formula worth seeing: your income-based limit isn't your monthly budget, it's that budget converted into a loan amount using the same present-value annuity math a lender uses to price any fixed payment. On a $500,000 home with a $300,000 balance, good credit, $9,000 monthly income and $2,000 of other debts, equity caps borrowing at $125,000 — well below the roughly $215,000 income alone would support.
How a monthly-income limit becomes a dollar loan limit
The equity gate is simple subtraction — the credit-tier CLTV ceiling times home value, minus what's owed. The income gate takes an extra step most explanations skip: it first finds how much new monthly payment fits under the debt-to-income ceiling, then converts that monthly figure into a principal using the standard loan annuity formula run in reverse, at the HELOC repayment rate and term.
That gap matters practically: raising income-side room (paying off a car loan, say) does nothing for this borrower, because equity is already the tighter limit. The DTI conversion only becomes the story when the two numbers are close, or when income is thin relative to a large, low-balance home — the classic equity-rich, income-light case the calculator's own notes call out for retirees.
Why a HELOC's payment jumps at year ten
A HELOC is modeled here in two distinct phases, not one loan. For the first 10 years — the draw period — this calculator charges simple interest on the balance with no principal reduction, so a $100,000 draw at an illustrative 8.5% costs about $8,500 a year, or roughly $708 a month, and the balance never shrinks on its own. At the end of the draw period the same $100,000 converts into a 20-year fully amortizing loan, and the payment resets to whatever principal-plus-interest that requires — about $868 a month at the same 8.5% rate. The jump from an interest-only $708 to a fully amortizing $868 is the exact mechanism behind the payment shock HELOC borrowers describe; it isn't a rate change, it's principal repayment starting for the first time.
A home equity loan skips that phase entirely — it fully amortizes over 15 years from day one, so at a comparable illustrative 8.0% the same $100,000 costs about $956 a month with no later jump, and roughly $72,000 of total interest over the term versus a HELOC's mix of interest-only and amortizing payments. The trade is the one the page above describes: certainty from month one against a lower cost if the balance is repaid quickly during the draw period.
Pricing the cash-out trade with a real rate
The cash-out comparison this calculator runs isn't the rate on the new money — it's the payment on the entire resulting mortgage against the payment on the loan being replaced. Freddie Mac's Primary Mortgage Market Survey for the week ending September 3, 2026 put the average 30-year fixed rate at 6.71%. Against a hypothetical existing $300,000 balance at 4% with 25 years left, refinancing that balance plus a $100,000 draw into a new $400,000, 30-year loan at 6.71% prices to a $2,584 monthly payment — versus $1,584 on the old loan alone, an increase of about $1,000 a month before a dollar of the new cash has done anything.
That $400,000-at-6.71% payment is the same figure this calculator's underlying 30-year amortization produces at any page that prices a loan at that rate and balance — it isn't specific to a refinance scenario, which is exactly why the comparison is fair: a cash-out refi is priced with the same math as any other 30-year mortgage, just against a larger, re-rated balance.
What the interest deduction actually covers now
IRS Publication 936 is direct on the point that trips people up most: "No matter when the indebtedness was incurred, you can no longer deduct the interest from a loan secured by your home to the extent the loan proceeds weren't used to buy, build, or substantially improve your home." A HELOC or home equity loan used to pay off credit cards or fund a vacation is still secured by the house, but the interest on that portion is not deductible — only the share actually spent on the home qualifies, and that share has to be tracked separately from the rest of the draw.
One deduction is different for 2026: the mortgage insurance premium deduction is back. Mortgage insurance — PMI on a conventional loan or MIP on FHA — is treated the same way whichever of the three products in this calculator's comparison you choose: it was not deductible for tax years 2022–2025, and Public Law 119-21 reinstated it for 2026, subject to the $100,000–$109,000 adjusted gross income phase-out.
Methodology
Borrowing-power figures are produced by this calculator's own two-gate formula: an equity-based ceiling from the credit-tier CLTV limit, and an income-based ceiling from the standard loan annuity formula run against the debt-to-income room under a 43% ceiling. HELOC, home equity loan and cash-out refinance payments use the same annuity formula at illustrative rates for the two second-lien products and Freddie Mac's published September 3, 2026 30-year average for the refinance leg. Deduction rules are quoted verbatim from IRS Publication 936.
Sources
- Freddie Mac — Primary Mortgage Market Survey — accessed 2026-09-05
- IRS — Publication 936, Home Mortgage Interest Deduction — accessed 2026-10-14
- IRS — Publication 936 (2026 draft), Mortgage Insurance Premiums — accessed 2026-10-14
- Public Law 119-21, section 70108 (qualified residence interest) — accessed 2026-10-14
Frequently asked questions
How much can I borrow against my home?
Two limits apply and the lower one wins. First, lenders cap combined loan-to-value — typically 85%, rising to about 90% for strong credit and falling to 80% for thinner credit — so on a $500,000 home with a $300,000 mortgage, an 85% cap leaves roughly $125,000. Second, your debt-to-income ratio must stay under about 43% after the new payment. Equity-rich but income-light households are frequently capped by income rather than equity.
Is a HELOC or a home equity loan better?
It depends on whether you know the amount and how fast you will repay. A HELOC lets you draw only what you need and pay interest only on the balance, which is cheaper if you repay quickly — but the rate is variable and the payment jumps sharply when the draw period ends. A home equity loan gives you a lump sum at a fixed rate with a fixed payment, so you know the number for the whole term, but you pay interest on the entire amount from day one.
Should I do a cash-out refinance or take a second mortgage?
The deciding factor is usually the rate on your existing mortgage. A cash-out refinance replaces your whole loan, so if you hold a 3% or 4% rate from a few years ago, refinancing reprices your entire balance at today's rate — not just the cash you take out. The extra interest on the existing balance typically swamps any saving on the new money. A HELOC or home equity loan is a second lien and leaves the first mortgage untouched, which is why second liens have dominated since rates rose.
Is home equity loan interest tax deductible?
Only when the funds are used to buy, build, or substantially improve the home that secures the loan. Borrowing against your house to consolidate credit card debt, pay tuition, or buy a car does not qualify, even though the loan is secured by the home. Deductibility also requires that you itemize, and the debt counts toward the overall mortgage interest limit. Confirm your specific situation with a tax professional.
What credit score do I need for a HELOC?
Most lenders want 680 or above, with the best rates and the highest combined loan-to-value limits reserved for scores over 740. Credit affects two things here, not one: the rate you are offered, and how much of your equity the lender will let you access. On a $500,000 home, the difference between an 80% and a 90% combined loan-to-value cap is $50,000 of borrowing power.