Cash-out home loans on the rise for debt reduction, renovations

Home improvements, credit card consolidation and buying more real estate are among the reasons homeowners tap their equity.

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As homeowners sit comfortably on sizeable equity and low mortgage rates, many of them are turning their attention to renovations or paying down debt.

Americans this year are projected to spend $518 billion on home renovations, according to the Joint Center for Housing Studies at Harvard University.

At the same time, consumers also owe $1.25 trillion in credit card debt as of the first quarter of 2026, the New York Federal Reserve Bank says.

In my experience, home renovations, credit card consolidation and even buying more real estate are the top reasons homeowners tap home equity.

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Before we drill down into the financial instruments of equity extraction, let’s look at the housing universe.

—There are roughly 135 million single-family homes in the United States. These properties include single homes, duplexes, triplexes and fourplexes.

—There is approximately $17 trillion in total equity (property value minus any mortgage debt) as of the fourth quarter of 2025, according to Intercontinental Data Exchange.

—According to the New York Federal Reserve, the U.S. has $13.19 trillion of first lien mortgage debt as of the first quarter 2026. Outstanding home equity lines of credit or HELOCs have a total outstanding balance of $446 billion.

—There are 86.94 million mortgage accounts with an average balance of $151,484, according to Lending Tree. Of those, 76% have an interest rate below 5%, Federal Housing Finance Agency statistics show.

So, should you refinance your first mortgage or just add a HELOC or HELOAN?

It depends. Fixed rate mortgages are currently running in the low 6% range. Adjustable-rate mortgages can be had at the 5% range. With so many folks having a low (pandemic-era) mortgage rate, few property owners will want to move to today’s fixed rate.

Let’s say you have a $500,000 mortgage at 3%, and you are extracting $200,000 of home equity for a big home renovation on your $1 million home. You would certainly want to keep the existing first lien and get a second. Adjustable seconds or HELOCs run anywhere from a high 6% rate for a well-qualified borrower to 10%, depending on credit and other variables. Fixed-rate seconds are about the same when it comes to interest rates.

If you are in doubt about refinancing your first or getting a second, price them both to see what makes more mathematical and cash flow sense for you.

A HELOC is a revolving line of credit, like a credit card that allows you to borrow against the equity in your home. The rate is based on an index, plus a profit margin.

Unlike a credit card, your lender uses your home as collateral. In the event you don’t pay, the lender can foreclose on your home to pay off the HELOC debt. Due to collateral protection, HELOC lenders charge a lot less in interest, about one-third of what a credit card lender charges.

Most lenders use Wall Street’s prime rate as their index. Today that prime rate is 6.75%.

A margin or profit margin is added to the index, which sets the borrower’s rate.

Margins never change, but the index does change over time. So, when the Fed raises or lowers rates, the prime rate changes and tracks to that change. HELOCs are always adjustable.

Let’s say a lender was offering prime plus a 1% margin. That means your interest rate is 7.75%. Say another lender was offering you an introductory rate of 6% for six months. In the seventh month, the rate jumps to prime plus 2.5% or 9.25%.

If you think you are going to hold onto the HELOC for a long while, you are best to take the prime plus 1% margin as it will cost you less over time.

Some banks and credit unions may offer what’s called a no-cost HELOC. Others may charge from 0 to 4 points plus other closing costs. One point is equal to 1% of the loan amount. For example, 2 points on a $200,000 loan would be $4,000.

In my experience, banks and credit unions tend to be more conservative in terms of credit scores, underwriting requirements and the appraisal value.

HELOCs have a floor and a ceiling, whereas rates can never go below X when considering the index-plus-margin or above Y (18% tends to be the cap).

HELOCs do not offer monthly or yearly rate caps, except for an introductory rate.

Also, HELOCs allow you to pay interest only for up to the first 10 years. You can also borrow and pay back during that 10-year period, so long as there are still funds available on the line of credit.

For the remaining years (10,15, 20) the lender will amortize the payment using the remaining balance at the current interest rate, considering the number of months left.

A HELOAN is simply a fixed-rate second mortgage without all the moving parts of a HELOC. And, with a name distinction.

You take out all the money out at once. You cannot borrow incrementally like you can with a HELOC. The loan amortizes over 10, 15, 20 or 30 years. There is no prepayment penalty.

HELOANs work best for someone who already has an outstanding balance to pay off and doesn’t need any other funds.

The 30-year fixed rate averaged 6.36%, 1 basis point lower than last week. The 15-year fixed rate averaged 5.71%, also 1 basis point lower than last week.

The Mortgage Bankers Association reported a 1.7% mortgage application increase compared with one week ago.

Bottom line: Assuming a borrower gets an average 30-year fixed rate on a conforming $832,750 loan, last year’s payment was $247 more than this week’s payment of $5,187.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.625 %, a 15-year conventional at 5.5%, a 30-year conventional at 6.125%, a 15-year conventional high balance at 5.875% ($832,751 to $1,249,125 in LA and OC and $832,751 to $1,104,000 in San Diego), a 30-year high balance conventional at 6.375% and a jumbo 30-year-fixed at 6.25%.

Eye-catcher loan program of the week: A 30-year mortgage, 30% down, 5.25% for the first five years payments, and 1 point cost.

Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or [email protected].

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