Home Equity Loans and HELOCs

Home equity is the difference between what your home is worth and what you still owe on it. Two products let you borrow against that equity. A home equity loan hands you a lump sum at a fixed rate, repaid over a set term, which suits a single large expense like a renovation. A home equity line of credit, or HELOC, works more like a credit card secured by your home: you draw what you need during a draw period and pay interest only on what you use, usually at a variable rate.

Because your home is the collateral, these loans carry lower rates than unsecured borrowing. That same fact is the risk: if you cannot repay, you can lose the house. This is why home equity borrowing is best reserved for things that build value or genuinely cannot wait, like a necessary home repair or consolidating high-rate debt you have a firm plan to clear, rather than discretionary spending.

Most lenders let you borrow up to about 85% of your equity, though the exact limit depends on your credit and income. Watch the structure of a HELOC in particular: the low interest-only payments during the draw period can jump sharply once the repayment period begins and you start paying down principal. Know what that future payment looks like before you draw.