Home Equity Loans and HELOCs: How to Use Your Home's Value

If you've owned your home for a few years, you may be sitting on significant equity — the difference between what your home is worth and what you owe on your mortgage. You can borrow against that equity at relatively low rates. Here's how it works.

Home Equity Loan vs HELOC

• Home Equity Loan: Fixed amount, fixed rate, fixed monthly payment — like a second mortgage. Best for one-time expenses.
• HELOC (Home Equity Line of Credit): Revolving credit line, variable rate — like a credit card secured by your home. Best for ongoing or uncertain expenses.

How Much Can You Borrow?

Most lenders allow you to borrow up to 85% of your home's value minus what you owe. Example: Home worth $400,000, mortgage balance $250,000. Available equity: $400,000 × 85% = $340,000 - $250,000 = $90,000 maximum borrowing.

Current Rates (2025)

• Home equity loans: 7.5–9.5% fixed APR (vs 20%+ for credit cards)
• HELOCs: 8–10% variable APR (tied to the prime rate)
• Much cheaper than personal loans or credit cards for large amounts

Best Uses for Home Equity

• Home improvements that increase the home's value (kitchens, bathrooms, additions)
• Debt consolidation — replacing 20%+ credit card debt with 8–9% home equity debt
• Major medical expenses
• Education costs

The Critical Risk: Your Home Is Collateral

Unlike a personal loan or credit card, failing to repay a home equity loan means the lender can foreclose on your home. This is not a risk to take lightly. Never use home equity for discretionary spending, vacations, or anything that doesn't have a clear path to repayment. If your income is unstable, avoid home equity borrowing entirely.