As a single mom on a tight budget, I know how stressful it can be when a major unexpected expense comes up and you have no idea how you’re going to pay for it. Sometimes, no matter how frugal you are, there simply isn’t enough money to cover everything, and you need to look at other options. For homeowners, borrowing against the equity in their homes is one possibility, but it’s important to understand the risks before putting your family’s home on the line.
If you own a home, you may be sitting on a source of money you have not thought much about. As you pay down your mortgage and your home’s value changes over time, you build something called equity, and lenders will let you borrow against it. For a parent staring at a leaking roof, a pile of medical bills, or credit card balances with painful interest rates, that can sound like a lifeline.
It can be a useful tool, but it is also one of the few kinds of borrowing that puts your family’s home on the line. Before you apply for anything, it helps to understand how each option works, what it costs, and what could go wrong. Here is what to know first.
What Home Equity Actually Is
Home equity is the difference between what your home is worth and what you still owe on it. If your home is worth $300,000 and your mortgage balance is $200,000, you have $100,000 in equity. It grows when you make mortgage payments and when home values rise. It shrinks if home values fall or if you borrow against it.
You cannot usually borrow all of it. Lenders generally want you to keep a cushion, and many limit your total borrowing, including your existing mortgage, to somewhere around 80 to 85 percent of your home’s value, depending on the lender and the loan type. Using that example, 80 percent of $300,000 is $240,000. Subtract the $200,000 you already owe, and the most you could borrow is about $40,000, not $100,000. Lenders also look at your credit history, your income, and your existing debts before approving you.
Why Parents Consider Borrowing Against Their Home
Interest rates on loans secured by a home are often lower than rates on credit cards or unsecured personal loans, because the lender has the house as backup if you stop paying. That lower rate is the main reason people look at home equity in the first place.
Parents commonly consider it for major repairs, medical expenses, paying off high interest debt, college costs, or home improvements. Single parents in particular may feel the pressure of covering a big expense with only one income. Those are real needs, and borrowing against your home is not automatically a mistake. But the same feature that makes it cheaper, the house as collateral, is also what makes it risky.
The Risk Comes First
When you borrow against your home, you are agreeing that the lender can foreclose if you cannot repay. With a credit card balance, falling behind is miserable, but the card issuer does not get to take your house. With a home equity product, they can.
That is why it is worth being honest about how stable your income is. Think about what happens if you lose a job, get sick, or see a change in child support or other income you rely on. A payment that feels manageable today has to stay manageable for years.
There are other risks as well. If home values in your area drop, you could end up owing more than your home is worth, which makes it hard to sell or refinance. And borrowing always comes with costs, including fees, appraisals, and closing costs, that eat into the money you thought you were getting.
Option One: A Home Equity Loan
A home equity loan is a second mortgage. You borrow a set amount, receive all of it at closing, and then repay it in equal monthly payments over a set number of years. The interest rate is typically fixed, so your payment stays the same for the life of the loan.
That predictability is the biggest advantage. If you know exactly how much you need, such as a quote for a new furnace or a specific medical bill, a home equity loan lets you borrow that amount and plan your budget around a payment that will not change.
The downsides are worth knowing. You start paying interest on the full amount right away, even if you do not spend all of it immediately. You will likely pay closing costs. And you will have two monthly housing payments, your original mortgage and the new loan, which can strain a tight budget. Borrow only what you need, because it is easy to take more than necessary when a lender approves you for it.
Option Two: A Home Equity Line of Credit
A home equity line of credit, usually called a HELOC, works more like a credit card secured by your house. Instead of getting one payout, you get access to a credit limit and borrow from it as needed during a set period, commonly around 10 years, known as the draw period. You pay interest only on what you have actually used.
During the draw period, many HELOCs only require interest payments, which keeps monthly costs low. But when the draw period ends, the repayment period begins, which commonly lasts up to 20 years. Now you have to repay principal and interest, and the payment can jump sharply. Interest rates on most HELOCs also adjust over time, so your payment can rise even if you have not borrowed anything new.
A HELOC suits costs that come in stages, such as a renovation done over several months. The danger is that easy access to money can make it tempting to keep borrowing. Also keep in mind that lenders can sometimes freeze or reduce a credit line if your home’s value drops or your financial situation worsens, so do not count on it as a reliable emergency fund. Ask about annual fees, minimum withdrawal requirements, and charges for closing the account early.
Option Three: Cash-Out Refinance
With a cash-out refinance, you replace your current mortgage with a new, larger one and receive the difference in cash at closing. Say you owe $200,000 on a home worth $300,000. If you refinance into a $240,000 loan, you would receive about $40,000 in cash before closing costs are taken out. You end up with one loan and one monthly payment instead of two.
The details matter a great deal here. Closing costs on a refinance are often estimated at roughly 2 to 6 percent of the loan amount, and that percentage applies to the entire new loan, not just the cash you take out. On a $240,000 loan, that can add up to thousands of dollars.
The bigger question is your interest rate. When you refinance, your whole balance gets the new rate. If your current mortgage has a low rate and today’s rates are higher, a cash-out refinance means paying more interest on your entire balance, not just the new money. In that situation, a home equity loan or HELOC, which leaves your first mortgage alone, may cost less overall. On the other hand, if your current rate is higher than what you could get now, refinancing could lower your rate and give you cash at the same time.
You should also think about the loan term. If you are eight years into a 30-year mortgage and refinance into a new 30-year loan, you are starting the clock over, which can mean paying interest for many more years. Some lenders offer shorter terms, which raise the monthly payment but save interest.
Lender rules apply as well. For conventional loans on a primary residence, lenders commonly cap borrowing at around 80 percent of the home’s value, and FHA cash-out loans have a similar general limit. Veterans and service members with VA eligibility may be able to borrow a higher share, though individual lenders set their own limits. You will need an appraisal, and lenders will look at your credit and your debt compared to your income.
How the Three Options Compare
- Best for a single, known expense: A home equity loan, because the amount and payment are fixed.
- Best for costs that arrive over time: A HELOC, as long as you can handle payments that may rise and you trust yourself not to overspend.
- Best when your current mortgage rate is higher than today’s rates, or when you want one payment: Refinancing the whole mortgage, as long as the closing costs and new term still make sense.
None of these is better in every situation. The right choice depends on your current mortgage rate, how much you need, how long you plan to stay in the home, and how steady your income is.
Questions to Ask Before Choosing a Lender
Compare offers from at least three lenders, including a credit union or local bank, since rates and fees can differ quite a bit. For most closed end mortgage loans, lenders must give you a Loan Estimate within three business days of applying, which makes it easier to compare costs side by side. Whatever you are offered, ask:
- What is the annual percentage rate, and how does it include fees?
- Is the interest rate fixed, or can it change over time?
- What are the closing costs, and can any be reduced or waived?
- Is there a penalty for paying the loan off early?
- For a HELOC, what happens when the draw period ends, and what will the payment likely be?
- What happens to my monthly payment if rates rise?
Get answers in writing, and read the paperwork before signing. If anything is confusing, ask the lender to explain it again or have someone you trust review it.
Smart Uses and Poor Uses
Some reasons to borrow against your home hold up better than others. Repairs that protect your home’s safety and value, like a roof, plumbing, or heating system, are generally easier to justify, since the money goes back into the asset securing the loan. Paying off high interest credit card debt can save money too, but only if you have dealt with whatever caused the debt in the first place. If you clear the cards and then run them up again, you have turned unsecured debt into debt secured by your home and added new balances on top.
Poor reasons include vacations, everyday bills, and risky investments. Borrowing against a long-term asset to cover short-term wants leaves you paying for the purchase long after the enjoyment is gone. A good test is to ask whether you would still be glad you borrowed in five years.
Taxes are another consideration. Under current IRS rules, interest on home equity borrowing is generally deductible only if the money is used to buy, build, or substantially improve the home that secures the loan, and limits apply. If you plan to count on a deduction, check with a tax professional first.
Alternatives to Try First
Before putting your house on the line, look at what else might work. A nonprofit credit counseling agency can review your budget and may be able to set up a debt management plan, often with reduced interest rates from creditors. Many HUD-approved housing counselors offer free or low-cost advice on mortgage and housing questions.
If medical bills are the problem, ask the provider or hospital about payment plans and financial assistance. Nonprofit hospitals are required by federal law to have financial assistance policies. For credit card debt, a balance transfer card with an introductory low rate or a personal loan may reduce interest without risking your home, as long as you can pay it off in time.
For repairs, check whether your local government, a nonprofit, or a state housing agency offers home repair assistance. The USDA also runs a home repair program for very low income homeowners in rural areas, with loans available and grants for some older homeowners. And if you are already struggling with your mortgage payments, contact your servicer early, since options are usually better before you fall behind.
Watch for Scams and Pressure
Home equity can attract bad actors. Be wary of contractors who show up uninvited and offer to arrange financing, lenders who push you to borrow more than you asked for, anyone who promises approval regardless of credit, and any request for large upfront fees. Never sign documents with blank spaces, and do not let anyone rush you.
You do have some protection. For most home equity loans, HELOCs, and refinances on your primary home, federal law generally gives you three business days after closing to cancel. It is a useful safety net, but it is better not to need it.
Take Your Time Before You Sign
Borrowing against your home can be a smart move when the need is real, the numbers are clear, and your income can handle the payments. It can also quietly put your family’s home at risk if you borrow for the wrong reasons or without a plan. Start by working out exactly how much you need and why, check the alternatives, and compare offers from several lenders. Be honest about your budget, including what would happen if your income dropped. And if a deal only works when everything goes perfectly, it is probably not the right deal for your family.
