If you've owned your home for a while or made a sizable down payment, there's a good chance you've built up meaningful equity — and that equity can be borrowed against at rates well below those of credit cards or personal loans. But because these loans are secured by your home, the stakes are higher than with other borrowing. This guide covers how home equity works, your two main borrowing options, and what to watch out for.
What is home equity?
Home equity is simply the difference between what your home is worth and what you still owe on your mortgage. If your home is worth $400,000 and you owe $250,000, you have $150,000 in equity. Lenders won't let you borrow against all of it — most cap total borrowing (your existing mortgage plus any new loan) at 80-85% of your home's value, known as the combined loan-to-value ratio (CLTV). In the example above, an 80% CLTV limit means total borrowing can't exceed $320,000, leaving up to $70,000 available to borrow against your equity.
Home equity loan vs. HELOC: two different tools
Home equity loan: A lump-sum loan with a fixed interest rate and fixed monthly payments over a set term (often 5-30 years) — functionally similar to a second mortgage. Best for one-time expenses where you know the exact amount you need, like a major renovation or debt consolidation, because the predictable payment makes budgeting straightforward.
HELOC (Home Equity Line of Credit): A revolving line of credit, similar to a credit card, that you can draw from as needed up to your approved limit during a 'draw period' (often 10 years), followed by a repayment period. HELOCs typically carry variable interest rates, so payments can fluctuate with market rates. They're well-suited for ongoing or uncertain expenses — like a multi-phase renovation or an emergency fund — where you don't want to borrow (and pay interest on) the full amount upfront.
Smart uses — and risky ones
Home equity is often used for home improvements that increase the property's value, debt consolidation (replacing high-rate credit card debt with a lower-rate secured loan), or major expenses like education or medical bills. The key risk to remember: your home is the collateral. If you can't make payments, the lender can foreclose — just as with your primary mortgage. This makes home equity borrowing a poor fit for discretionary spending (vacations, everyday expenses) or for paying off debt without addressing the spending habits that created it, since you'd be converting unsecured debt into debt secured by your house.
Tax deductibility basics
Since the Tax Cuts and Jobs Act of 2017, interest on home equity loans and HELOCs is only tax-deductible if the borrowed funds are used to 'buy, build, or substantially improve' the home that secures the loan — for example, a kitchen remodel or a new roof. If you use the funds for other purposes, like consolidating credit card debt or covering tuition, the interest generally isn't deductible. There are also overall limits on the combined mortgage and home-equity debt that qualifies for the deduction. Because tax rules can change and depend on your specific situation, it's worth confirming current rules with a tax professional before assuming a deduction applies.
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Frequently Asked Questions
How much can I borrow with a home equity loan?+
Most lenders cap combined borrowing (your mortgage plus the new loan) at 80-85% of your home's appraised value. For example, a $400,000 home with a $250,000 mortgage balance and an 80% CLTV limit would allow up to $70,000 in additional borrowing ($320,000 − $250,000).
Is a home equity loan or a HELOC better for a renovation?+
It depends on the project. A home equity loan's lump sum and fixed payment work well for a single, well-defined project with a known cost — like a bathroom remodel. A HELOC's flexibility suits ongoing or multi-phase projects where costs may change, since you only pay interest on what you actually draw.
What happens if I can't repay a home equity loan?+
Because the loan is secured by your home, missed payments can ultimately lead to foreclosure — just as with a primary mortgage. This is the central risk of home equity borrowing, and it's why these loans are best reserved for purposes that improve your financial position or your home's value, rather than discretionary spending.