Updated October 13, 2026
A couple in Collierville refinanced in 2021 at 3%. The kids are in high school, the kitchen is original to the house, and the upstairs bathrooms still have the brass fixtures the builder put in around 1994. They aren’t moving. They’d like the house to work for the next ten years, and they know there’s a lot of equity sitting in it. Every lender ad they see says the same thing: cash-out refinance.
For them, that’s almost certainly the wrong tool. If you’re working out how to use home equity while you stay in your house, the 2026 answer starts with what you do to your first mortgage, which is nothing. Leave the low-rate loan alone and borrow beside it, with a home equity line of credit (HELOC) or a home equity loan.
That’s the short version for Germantown and Collierville owners who plan to stay. If you’re thinking about selling instead, and want to know what your equity would buy on the next move, our post on how much equity you have in your home is the one you want.
What you can borrow
Your equity is what the house is worth today minus what you owe on it. What a lender will let you borrow is smaller than that.
Most home equity lenders cap your combined loan-to-value (CLTV) somewhere around 80% to 85%. That means all the debt on the house, your first mortgage plus the new loan, can’t go past that share of the appraised value. Some credit unions go higher, and some banks stop at 80%. The old “keep 20% in the house” rule of thumb comes from the same idea, and conventional cash-out refinances generally top out at 80% on a primary home.
The math looks like this:
- Home value × 0.85 = the most total debt a lender will allow
- Subtract your current mortgage balance
- What’s left is roughly your borrowing room
So a house worth $500,000 with a $250,000 balance has about $175,000 of room at 85% CLTV, not $250,000. The appraisal decides the first number, which is why it helps to know your value before you apply. Our home value estimate is a quick place to start, and an agent’s opinion on a Germantown house with a 1980s floor plan will be closer than an online estimate.
Why your 3% mortgage changes the answer
About half of mortgaged homeowners in the country are in that Collierville couple’s position. According to the FHFA’s National Mortgage Database, 49.1% of outstanding mortgages carried a rate under 4% as of the second quarter of 2026. Around Germantown and Collierville, plenty of owners bought or refinanced in 2020 and 2021 and are sitting on exactly that kind of loan.
A cash-out refinance pays off that loan and replaces it with a bigger one at today’s rate. The new rate doesn’t apply only to the cash you took out. It applies to the whole balance, including the $250,000 or $300,000 that used to cost you 3%. It also restarts the clock, so six years into a 30-year loan you’re signing up for 30 more, and closing costs are figured on the entire new loan.
Our position: if your first mortgage is under 4%, a cash-out refinance is almost never the right way to tap your equity. A HELOC or home equity loan will usually carry a higher rate than a new first mortgage, but it only applies to the money you borrow. The cheap loan underneath keeps doing its job.
Cash-out still earns its place in a few cases: your rate is already near the market, you owe so little (say $40,000 on a house you’ve had for 25 years) that refinancing it costs almost nothing extra, or you have to refinance anyway, for instance to take an ex-spouse off the loan after a divorce. We made a related argument about moving in should you give up your low mortgage rate to move.
HELOC vs home equity loan vs cash-out refinance
All three turn equity into cash. Once the money’s in your account, they behave very differently.
| HELOC | Home equity loan | Cash-out refinance | |
|---|---|---|---|
| How you get the money | Draw as needed, up to a limit | One lump sum | One lump sum at closing |
| Rate | Usually variable, tied to prime | Usually fixed | Fixed or adjustable |
| Your first mortgage | Stays as is | Stays as is | Paid off and replaced |
| Best fit | Projects paid in stages, flexible needs | One known cost, payment you can plan on | Rate near market, or small existing balance |
Home equity line of credit
A HELOC works like a credit card secured by your house. You get a credit limit, draw what you need, and pay interest only on what you’ve drawn. The CFPB’s HELOC guide walks through the mechanics, and the details deserve attention because they’re where people get hurt.
Nearly all HELOCs are variable-rate. The rate is usually an index, most often the prime rate, plus a margin set by the lender. When the Federal Reserve moves rates, prime follows, and so does your payment, even if you haven’t borrowed another dollar.
Most lines run in two phases. A common setup is a 10-year draw period, when you can borrow and often pay only interest, followed by a 20-year repayment period, when the line closes and you pay principal and interest. The jump between those phases surprises people. A balance that cost $500 a month interest-only can cost close to $650 once principal kicks in. Some lenders let you lock part of your balance at a fixed rate, which is worth asking about.
The lender can also freeze or cut your line if your home’s value drops a lot or your finances change. That matters if you plan to count on the line as a backup fund. It may not be there in the same downturn that makes you need it.
The upside is flexibility. A Germantown remodel rarely gets paid in one check. There’s a deposit to the contractor, a draw when cabinets arrive, a final payment after the punch list. A HELOC lets you borrow along that schedule and pay interest only on what’s been spent.
One Tennessee cost to know: the state charges a tax on recorded debt of $0.115 per $100 over the first $2,000, based on the maximum amount the instrument secures. On a $150,000 line that’s about $170 at closing, whether you draw $5,000 or all of it. It’s small, but it’s a reason not to open a line far bigger than you need.
Home equity loan
Same second-lien position, opposite personality. You get one lump sum at a fixed rate over a fixed term, anywhere from 5 to 30 years depending on the lender, and the payment never moves. That suits a single cost you can price in advance, like a $35,000 roof and HVAC replacement, and it suits people who know an open credit line would get used for things it shouldn’t. You do pay interest on the whole amount from month one, spent or not.
A worked example
Illustrative numbers only. These aren’t rate quotes or market data for any neighborhood, so run your own with a lender.
A Germantown couple’s house would appraise at $575,000. They took a $300,000 mortgage at 3% in 2021. It’s down to about $270,000 now, and the principal-and-interest payment is about $1,265. They want $80,000 for a kitchen and a downstairs primary bath. At 85% CLTV they could borrow up to about $218,750, so they have plenty of room. Which tool they use is the real decision.
If they cash-out refinance into a $350,000 loan at an assumed 6.25% for 30 years, the payment jumps to about $2,155 before closing costs. Worse, the $270,000 they’d already borrowed at 3% now costs 6.25% too. That’s roughly $8,800 of extra interest in the first year alone, on money that was cheap a week earlier.
The HELOC version, at an assumed 7.5% variable rate, adds about $500 a month interest-only during the draw period: $1,765 all in. Paying it off over 20 years instead takes the HELOC payment to about $645, or $1,910 total, and it shrinks as the balance does.
So the HELOC is $245 to $390 a month cheaper here, despite the higher rate. Its weak spot is that rate. If prime rises two points, theirs does too.
What’s worth borrowing against
Your house is the collateral. Stop paying and the lender can foreclose. Before any equity loan, we’d ask one question: does this money make the house better, or your finances safer?
Renovations that let you stay
This is the best use of home equity, and it’s the most common one we see around Germantown and Collierville. A lot of the housing stock in both towns dates to the ’70s, ’80s, and ’90s. The bones are good, the lots are big, the schools are why people bought, and the kitchens, baths, windows, and mechanicals are on their original or second round.
Borrowing to fix that makes sense for two reasons. Some projects add resale value, and our post on the home improvements with the best ROI covers which ones tend to pay back. Others won’t fully pay back at resale but still make sense because they let you stay. A first-floor primary suite for owners in their 60s, or a separate living space for an aging parent, can be cheaper than moving. If that second one is on your list, our post on multi-generational homes is worth reading first.
A pool or a big outdoor kitchen is a different conversation. Plenty of Collierville families enjoy theirs for years, and that’s a fair reason to build one. Just don’t borrow for it expecting the next buyer to pay you back.
Paying off high-rate debt, carefully
Swapping 24% credit card debt for a home equity loan at a fraction of that rate can save real money. It also turns unsecured debt into debt with your house behind it, and the interest isn’t tax-deductible (more on that below). We’d only do it with a fixed-rate home equity loan and a payoff date you can see, never an open line. The families who get burned are the ones whose card balances creep back within two years, because now they have both.
Uses we’d talk you out of
- Vacations, weddings, and other spending you’ll still be paying off years later
- Cars, which lose value faster than a 15- or 20-year HELOC gets paid down
- “Investing” in stocks, crypto, a rental down payment you haven’t run the numbers on, or a friend’s business. If the bet goes bad, you still owe the money and the lien is still on your house.
- A buffer for a budget that doesn’t balance. That’s a cash-flow problem, and borrowing just delays it.
The tax rule most people get wrong
People often assume HELOC interest is deductible the way mortgage interest is. Usually it isn’t.
Under IRS rules described in Publication 936, interest on a home equity loan or HELOC is deductible only if you use the money to buy, build, or substantially improve the home that secures the loan. The label on the loan doesn’t matter. What you spend the money on does. A kitchen remodel can qualify. Paying off a car or credit cards doesn’t.
The 2017 tax law set this rule up as temporary. The 2025 tax law, the One Big Beautiful Bill Act, made it permanent, along with the $750,000 cap on total mortgage debt that qualifies for the interest deduction. Your first mortgage and your equity loan count together toward that cap.
Two more limits apply. You only get the benefit if you itemize instead of taking the standard deduction, which many households no longer do, a point we covered in our post on the tax benefits of owning a home in Memphis. And Tennessee has no income tax on wages, so there’s no state deduction to stack on top. Keep your contractor invoices and draw records either way, and talk to a CPA before you count on any tax savings.
A big renovation can also raise your property tax over time once the county catches the added value at a reappraisal. Our Germantown and Shelby County property tax explainer explains how the county and city bills work.
Reverse mortgages for owners 62 and older
A reverse mortgage works the opposite way. Instead of making payments, you draw on your equity and the loan balance grows over time, usually coming due when you sell, move out, or die.
Most are FHA-insured Home Equity Conversion Mortgages (HECMs). You have to be at least 62, live in the home as your primary residence, and complete counseling with a HUD-approved counselor first. You also stay responsible for property taxes, homeowners insurance, and upkeep, and falling behind on those can trigger the loan coming due. For 2026, the most home value FHA will count toward a HECM is $1,249,125, up from $1,209,750 in 2025, per HousingWire. HECMs are non-recourse, so neither you nor your heirs will owe more than the home is worth when it’s sold.
The upfront costs are steep, and the equity you leave your kids shrinks every year the loan runs. The CFPB’s reverse mortgage guide is a neutral place to read up. Our honest bias: a retired couple rattling around a 3,500-square-foot Germantown house should price out downsizing before they sign a reverse mortgage on it. A reverse mortgage keeps you in the big house. Sometimes that’s the right answer, but nobody should land there by default.
When to leave it alone
If a two- or three-point rise in your HELOC rate would strain the budget, don’t open one. If your income feels shaky, don’t borrow against the asset you’d have to sell if things went wrong.
And if you’re likely to sell within two or three years, wait. You’d pay closing costs on a loan you’ll pay off at the closing table, and a kitchen you remodel for the next owner rarely returns its full cost. Put the equity toward the next house instead.
Keep the 3% loan where it is
Whatever you borrow, put it in a second loan that sits beside the low-rate first mortgage and leaves it alone. For most Germantown and Collierville owners in 2026, that one decision is worth more than any rate you’ll shop for on the equity loan itself.
We’re not lenders, so we won’t quote you a rate. We can tell you what your house is likely to appraise for, which projects buyers in your part of Germantown or Collierville pay for, and whether you’re better off renovating or moving. If that would help, get in touch.
