Home Equity Loans and HELOCs: How to Borrow Against Your Home

Home equity is the difference between what your home is worth and what you owe on it. If your home is worth $400,000 and your mortgage balance is $250,000, you have $150,000 in equity. That equity can be borrowed against through two mechanisms: a home equity loan, which provides a lump sum at a fixed rate, or a home equity line of credit (HELOC), which provides a revolving credit line at a variable rate. Both use your home as collateral.

That collateral distinction is the most important fact about both products. A home equity loan or HELOC is not like a credit card — a missed credit card payment damages your credit score. A missed home equity payment puts your home at risk of foreclosure. The lower interest rates these products offer exist because the lender has a secured claim on your property. Before borrowing against your home, that consequence needs to be front of mind, not buried in the terms.

Home equity loans — the fixed-rate lump sum

A home equity loan provides a lump sum at closing, repaid over a fixed term — typically five to thirty years — at a fixed interest rate. Rates in 2024 have ranged from approximately 8% to 10% for borrowers with good credit, far below the 20% to 26% charged on most credit cards. The payment is predictable and doesn't change with market conditions, which makes planning straightforward.

Home equity loans make the most sense for one-time expenses with a known total: a full kitchen renovation, a large medical bill, a significant home repair. You know the cost, you borrow exactly what you need, and you begin repaying immediately at a predictable rate. Most lenders allow borrowing up to 80% to 85% of your combined loan-to-value ratio — meaning on a $400,000 home with a $250,000 first mortgage, you could typically borrow up to $80,000 to $90,000.

HELOCs — the flexible revolving credit line

A HELOC works more like a credit card secured by your home: you're approved for a maximum credit line and draw against it as needed, paying interest only on what you've borrowed. A typical HELOC has a draw period of five to ten years during which you can borrow and repay freely, followed by a repayment period of ten to twenty years during which the balance is paid down. Rates are variable — usually tied to the prime rate plus a margin — which means payments fluctuate as rates change.

HELOCs suit ongoing or uncertain-cost expenses: a home renovation project with evolving scope, a business that needs intermittent capital, college tuition paid over four years. The flexibility to draw only what you need and repay it reduces the cost versus borrowing a lump sum upfront. The risk is the variable rate — in 2022 and 2023, HELOC rates that started at 4% rose to 9% to 10% as the Fed raised rates, significantly increasing monthly payments for existing HELOC borrowers.

Tax deductibility — what the rules actually say

The Tax Cuts and Jobs Act of 2017 changed the deductibility rules for home equity debt. Interest on home equity loans and HELOCs is deductible only if the proceeds are used to 'buy, build, or substantially improve' the home that secures the loan. Using a home equity loan to pay off credit cards, fund a vacation, or cover medical expenses — regardless of how common those uses are — does not produce a deductible interest expense under current law. The deductibility advantage applies specifically to home improvement uses.

The right and wrong reasons to borrow against your home

Strong use cases: home improvements that increase the home's value or address necessary repairs, consolidating high-rate credit card debt (reducing a 24% rate to 9% is meaningful, as long as you don't run the cards back up), or funding education costs. Problematic use cases: borrowing to fund discretionary spending or lifestyle expenses, investing borrowed home equity in volatile assets, or using a HELOC as a recurring income supplement when income is insufficient to cover expenses.

The key stress test for any home equity borrowing: if your income dropped by 30% tomorrow, could you still make this payment? A home equity loan on a home you can't sell quickly during financial stress creates the same trap as any secured debt — it ties up your most significant asset against a debt that must be repaid even when circumstances change. The low rate is attractive; the collateral is what demands respect.