If you’ve owned your home for a while, you may have built up a lot of equity — the difference between what the home is worth and what you owe. Two common ways to borrow against it are a home equity loan and a home equity line of credit (HELOC). They sound alike but work quite differently.
How much can you borrow?
Lenders typically let you borrow up to a combined loan-to-value (CLTV) of 80% to 85%, sometimes 90%. Example: your home is worth $400,000 and you owe $220,000. At 85% CLTV, total borrowing could reach $340,000, so you might access up to $120,000.
Home equity loan: a lump sum, fixed rate
Sometimes called a second mortgage. You receive the full amount up front and repay it in fixed monthly payments over a set term, often 5 to 30 years.
- Best for: one-time, known costs — a big renovation with a firm quote, consolidating high-interest debt.
- Pros: predictable payment, fixed rate.
- Cons: you pay interest on the full amount from day one, even if you don’t need it all yet.
HELOC: a flexible line of credit
A HELOC works more like a credit card secured by your home. You get a credit limit and borrow what you need, when you need it, during a draw period (often 10 years). During that time, many HELOCs only require interest payments. Then comes the repayment period (often 20 years), when you can’t borrow more and must repay principal plus interest.
- Best for: ongoing or uncertain costs — a renovation done in phases, tuition paid over several years.
- Pros: pay interest only on what you use; flexibility.
- Cons: usually variable rates, so payments can rise; the jump from interest-only to full payments can be a shock.
The payment shock to plan for
Suppose you owe $60,000 on a HELOC at 8%. Interest-only payments are about $400 a month. When the draw period ends and you start repaying over 20 years, the payment jumps to roughly $500 — and more if rates have risen. Plan for that from the start.
Costs to compare
- Interest rate and APR (see APR vs. interest rate)
- Closing costs, appraisal, and origination fees
- Annual or inactivity fees on HELOCs
- Early closure fees if you pay off a HELOC within a few years
- For HELOCs: rate caps and whether you can convert a portion to a fixed rate
The big risk: your home is collateral
Both are secured by your house. If you can’t pay, you could face foreclosure. That’s why using home equity to pay off credit cards needs care: you’re turning unsecured debt into debt backed by your home. It only works if you stop running up new card balances. The CFPB’s homeownership resources include guidance on home equity borrowing.
Tax treatment
Interest on home equity debt is generally deductible only if the money is used to buy, build, or substantially improve the home securing the loan, and only if you itemize deductions. Interest on equity used for a car or credit cards generally isn’t deductible.
Alternatives worth comparing
- Cash-out refinance: replaces your mortgage with a bigger one. Can make sense if current rates are close to or lower than your existing rate — see our refinance guide.
- Personal loan: no collateral, faster, but usually higher rates.
- Home improvement loans — including options for people with lower credit, covered in home improvement loans with bad credit.
Bottom line
Choose a home equity loan when you know exactly how much you need and want a fixed payment. Choose a HELOC when costs are spread out or uncertain and you can handle a variable rate. Either way, borrow only what you need and have a clear repayment plan — your home is on the line.
