If you've been paying your mortgage and your home has appreciated, you've likely built up equity—the difference between what your home is worth and what you owe. But should you tap into it? This guide helps you understand when using home equity makes sense and when to proceed with caution.
What is Home Equity?
Home equity is the portion of your home that you actually own. It's calculated as:
Home Value − Mortgage Balance = Home Equity
For example, if your home is worth $500,000 and you owe $300,000 on your mortgage, you have $200,000 in equity. That does not mean you can borrow all of it. In Texas, the new loan plus everything else secured by your home generally cannot exceed 80% of the home's fair market value. In this example, total secured debt could not pass $400,000, so after a $300,000 mortgage the most you could add is $100,000.
Home Equity Loan vs. HELOC
There are two main ways to access your home equity:
Home Equity Loan
- Lump sum payment
- Fixed interest rate
- Fixed monthly payments
- Best for one-time expenses
HELOC
- Revolving line of credit
- Variable interest rate (typically)
- Draw as needed during draw period
- Best for ongoing or uncertain expenses
Smart Uses for Home Equity
Home equity can be a powerful financial tool when used wisely. Here are some situations where tapping your equity often makes sense:
Home Improvements
Renovations that increase your home's value (kitchen, bathrooms, additions) can be worthwhile, but whether a project adds value depends on the project, the neighborhood and the market. Weigh the cost against what you expect it to add.
Debt Consolidation
If you have high-interest credit card debt, consolidating to a lower-rate home equity product may lower the interest you pay, depending on the rate and terms you qualify for. However, you're converting unsecured debt to debt backed by your home.
Education Expenses
Home equity rates are often lower than private student loans, making it a potential option for education funding. Compare rates and terms carefully.
Major Life Events
Medical expenses, emergency repairs, or other significant needs may justify tapping equity when no better options exist.
When to Think Twice
Using home equity isn't always the right choice. Be cautious about:
- • Vacations or luxury purchases: These don't increase your net worth
- • Day-to-day expenses: If you're using equity for regular bills, you may have a budget issue
- • Risky investments: Never borrow against your home for speculative investments
- • Cars: Auto loans often have competitive rates without risking your home
⚠️ Important: Your Home is Collateral
With both Home Equity Loans and HELOCs, your home secures the debt. If you can't make payments, you could face foreclosure. Only borrow what you can comfortably repay, and have a clear plan for how you'll use and repay the funds.
Texas Home Equity Rules to Know
Texas protects homesteads more strictly than most states. Home equity loans and HELOCs on a Texas homestead must follow Section 50(a)(6) of the Texas Constitution, which includes rules like these:
- • 80% limit: the new loan plus all other debt secured by the home cannot exceed 80% of its fair market value
- • 12-day wait: the loan cannot close until at least 12 days after you apply and receive the required notice
- • Fee cap: many of the lender's fees are limited to 2% of the loan amount, with exceptions such as a third-party appraisal and a survey
- • Limited liability: the loan generally cannot make you personally liable beyond the home except in cases of actual fraud, and foreclosure requires a court order
- • Where you close: at the lender's office, an attorney's office or a title company
These rules can be amended and lenders may add their own requirements, so confirm the current details with your loan officer. Replacing your mortgage with a larger loan is treated differently; see our refinance guide for how a cash-out refinance works in Texas.
Home Equity in the Frisco/DFW Market
Many homeowners in Frisco and the greater DFW area have built meaningful equity through years of payments and past appreciation. Your own equity depends on your home's current value and your mortgage balance, and home values can go down as well as up.
Common local uses include:
- • Pool installations (popular in Texas summers)
- • Kitchen and bathroom remodels
- • Outdoor living spaces
- • Home offices and additions
- • Energy-efficient upgrades (new HVAC, windows, insulation)
How to Get Started
- 1Estimate your equity:
Get a rough idea of your home's current value (online estimates, recent comparable sales) and subtract your mortgage balance.
- 2Define your purpose:
Know exactly how you'll use the funds and how you'll repay them.
- 3Compare options:
Talk to a lender about Home Equity Loan vs. HELOC and which fits your needs.
- 4Review the terms:
Understand the interest rate, fees, draw period, repayment terms, and any penalties before committing.
Wondering How Much Equity You Have?
Our team can help you understand your options and whether tapping your equity makes sense for your situation.
Check Your Equity Options