Can You Use Home Equity to Start a Business?

Can you tap home equity to start a business? Yes—when you tap into your built-up equity, you can use the proceeds however you choose, including funding a new business venture. However, while doing so can be a smart move in some scenarios, it may not be the right option for everyone.

Let’s take an in-depth look at how starting a business using home equity actually works, the associated benefits and risks, and when you may be better off seeking out other sources of capital.

How Home Equity Funding Works for a Business

Over the past five years, the typical home has risen in value by nearly 30%, according to Federal Reserve sales data. This sharp increase has enabled many homeowners to tap into their accumulated equity to help transition into self-employment.

So, how exactly do you use home equity to fund a business? Typically, this is accomplished through a cash-out refinance, home equity loan, or home equity line of credit (HELOC).

Cash-Out Refinance

A cash-out refinance replaces your existing mortgage with a new, larger home loan. The difference between the new loan balance and the amount you currently owe is returned to you as a lump-sum cash payment at closing. Cash-out refinances can have fixed or variable interest rates, though fixed-rate options are far more common.

Using a cash-out refinance to fund a new business can make sense when:

• You’re able to refinance at an interest rate lower than your existing mortgage.
• You need to borrow a large amount relative to your current loan balance.
• You don’t want to manage monthly payments on multiple loans.

Home Equity Loan

A home equity loan is a type of second, or subordinate, mortgage that exists alongside your current primary loan. Like a cash-out refinance, it converts your equity into a lump-sum cash payment.

Home equity loans have fixed interest rates and consistent monthly payments. However, as a second mortgage, interest rates are generally higher than first-position loans.

You might opt to finance your startup with a home equity loan when:

• Your primary mortgage has an interest rate well below current market rates.
• You only need to access a small portion of your equity.
• You don’t want to reset the clock on your existing mortgage payments.

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) is another type of second mortgage that allows you to tap your equity as a revolving line of credit rather than as a lump sum of cash.

HELOCs are split into two distinct phases: an initial draw period followed by a repayment period.

During the draw period, you can borrow against your equity as often as you need while only making monthly interest payments on the accumulated balance. Once you enter the repayment period, you can no longer access your line of credit and must make principal and interest payments for the remainder of the loan.

Most HELOCs have variable interest rates, though many lenders allow you to convert a portion of your balance into a fixed-rate sub-loan for payment stability.

Using a HELOC may be the best option for funding your business when:

• You’ll need access to capital over an extended, multi-year period.
• You’re not entirely sure how much equity you’ll need to tap.
• You prefer lower interest-only payments during the initial draw phase.

Qualification Requirements

To borrow against your home equity, you’ll need to meet qualification requirements that vary by lender and loan type. These requirements include a certain level of established equity, a suitable credit score, and a debt-to-income ratio below the lender’s maximum limit.

How Much Equity Do I Need?

Most lenders require you to retain a certain amount of equity in your home after borrowing. This is typically expressed as a maximum loan-to-value (LTV)—meaning you can borrow up to that percentage of your home’s current appraised value.

Home equity loans and HELOCs express this as a combined loan-to-value (CLTV) that includes the balance on your primary mortgage.

While each lender can set their own maximum, common loan limits include:

• Cash-Out Refinance: 80% LTV
• Home Equity Loan: 85% CLTV
• HELOC: 85% CLTV

Refi.com‘s CLTV max is set at 85% for the primary lien.

Minimum Required Credit Scores

As with any loan, a higher credit score means a lower interest rate and more favorable loan terms. However, even borrowers with lower credit scores can tap into their home equity as long as they meet their lender’s minimum requirements.

Program guidelines set baseline minimums, but individual lenders—including Refi.com—often require higher scores. Typical minimum credit score requirements include:

• Cash-Out Refinance: 620 for conventional loans and 580 for FHA loans per program guidelines, though most lenders require higher scores
• Home Equity Loan: 660 to 680+
• HELOC: 660 to 680+

Note: Refi.com requires a minimum credit score of 660 for conventional cash-out refinances and 620 for FHA cash-out refinances.

Can I Access My Equity If I Have Other Existing Debts?

You can still borrow against your home’s equity if you have other existing debts. However, this can depend on your income level, as lenders have a maximum allowable debt-to-income (DTI) ratio.

This means your total monthly debt obligations—including the new mortgage payment—must not exceed a set portion of your monthly qualifying income.

Maximum DTI limits often include:

• Cash-Out Refinance: 50% (although many lenders prefer lower)
• Home Equity Loan: 43%
• HELOC: 43%

Keep in mind that lenders look for financial stability and will verify your actual earnings. You typically need a consistent and reliable source of income. Qualifying solely as a self-employed business owner—especially with a brand-new startup—can be challenging.

Advantages of Using Home Equity to Fund a Business

Why might someone choose to use home equity to fund their new business? Some of the primary advantages include:

• Interest rates that tend to be far lower than those of unsecured business loans or credit cards
• Easier access to capital if you have good credit and substantial equity
• Flexibility to use the funds for any purpose you choose
• No need for external investors who can dilute your business ownership

Risks & Important Considerations

There are also some serious downsides to weigh before using home equity to finance a startup. These risks include:

• You increase your monthly housing costs and could put your home at risk of foreclosure if you become unable to make timely mortgage payments.
• While interest paid on your mortgage is often tax-deductible, interest on equity used to start a business typically isn’t.
• Loans with variable interest rates (such as HELOCs) are susceptible to broader market movements, which could raise costs and reduce payment predictability.
• If you rely on business revenue to cover your payments, financial hardship can follow if the venture takes longer than expected to get off the ground.
• Borrowing against your home equity reduces your overall liquidity and future financial flexibility.

Home Equity vs. Business Loans

Both home equity financing and traditional business loans have their pros and cons. Here’s how the two options compare—and some scenarios where each may make more sense.

Collateral

By tapping into your built-up equity, you put your home at risk of foreclosure if you become unable to repay your mortgage. With an unsecured business loan, your personal liability is far more limited if you go into default.

Interest Rates

Interest rates for home equity financing are typically lower since your home secures the loan. Business loans tend to be unsecured, which translates to higher interest costs.

Qualification Requirements

Qualifying for home equity financing is primarily based on your personal finances and the level of equity in your home. Obtaining a traditional business loan, however, requires submitting a comprehensive business plan and often demonstrating existing revenue from your startup.

Best Use Cases

Home equity financing may be the better fit when you have:

• A stable source of income that can comfortably cover your increased housing costs
• A low mortgage balance and a sizable amount of built-up equity
• Excellent credit, allowing you to qualify for favorable interest rates

A traditional business loan may be the better choice if:

• Increasing your housing costs could put you under financial pressure
• You’re starting a business in a risky industry with a higher chance of failure
• You’ve already established your business and can show a proven track record of success

Is Using Home Equity Right for You?

Before deciding to tap into your home equity to start a business, make sure that you:

• Assess Your Business Plan: Borrowing against your home without a clear plan can be risky. Establish a practical timeline, revenue projections, and an exit strategy before moving forward.
• Calculate Your Equity: Determine how much equity you have and the amount you can access through various home equity financing options.
• Examine Your Credit and Financials: Pull your credit report and calculate your debt-to-income ratio to ensure you meet lender qualification criteria.
• Compare Alternative Financing: Take a hard look at alternatives—such as small-business loans, business lines of credit, and personal savings—to determine whether home equity is truly the best fit.
• Understand the Risk: Ask yourself how risky the venture is and whether you have a contingency plan in place if the startup doesn’t succeed.

Best Practices When Using Home Equity for a Startup

If you decide to move forward with home equity financing for your startup, keep these best practices in mind:

• Use your equity to fund high-value business investments—such as equipment and infrastructure—rather than everyday operating expenses.
• Keep your business and personal finances separate by opening a dedicated business checking account and carefully tracking how you use your funds.
• Hold funds in reserve for personal expenses and mortgage payments as a contingency in case your business takes longer than expected to generate revenue.
• Choose the appropriate type of home equity financing based on your funding needs, business timeline, and risk tolerance.
• Seek personalized advice from a mortgage professional, business advisor, and tax expert.
• Regularly monitor your home equity position and business performance over time.

Example Scenario

Here’s an example that illustrates what using home equity to start a new business could look like in practice.

Your home is valued at $400,000 and you have an existing mortgage balance of $200,000. You tap $100,000 in equity through a 20-year home equity loan at 8% interest—equating to a monthly principal and interest payment of $836.

You invest $75,000 into equipment and initial inventory for your business, while retaining $25,000 as a personal safety net and reserve for future business expenses.

Most new businesses take at least 18 months to reach profitability, so we’ll assume your venture operates at an average $1,000 monthly loss during that period. Your reserve funds cover those losses and home equity loan payments for the first 13 months. By the 14th month, you’re covering some of these costs out of pocket.

By month 15, you’re covering $1,836 in combined monthly costs entirely from personal savings. Even if the business turns a profit by month 18, you could spend nearly $6,000 extra covering operating costs and additional mortgage payments during that stretch. If profitability doesn’t arrive until month 24, that figure could exceed $18,000.

What If the Business Doesn’t Succeed?

If you decide after two years that the business isn’t viable—and keep in mind that nearly 40% of new businesses fail within the first three years—you’ll have already absorbed $24,000 in operating losses and still owe more than $200,000 in principal and interest on your home equity loan.

This is just one scenario—your business may reach profitability sooner and fully cover the monthly debt, offsetting any operating losses. But it’s important to understand the financial stakes before committing your home equity to a startup.

Using Home Equity to Start a Business

Using home equity to start a business can be a viable path—but it’s not without serious risk. You’re effectively putting your home up as collateral for your startup, which means careful planning and financial stability aren’t optional. Make sure you’ve done the math, compared all your financing options, and consulted with the right professionals before moving forward.

Explore Your Home Equity Options with Refi.com

When you’re ready to see what you qualify for, Refi.com can help you explore cash-out refinance, home equity loan, and HELOC options—all with competitive rates and straightforward terms. Start your home equity application with Refi.com today and find out how much equity you can put to work.