Borrowing Against What You Already Own
A home equity loan is a second mortgage: a fixed-rate lump sum secured against the value of your house beyond what the first mortgage claims. The lender caps total borrowing at a combined loan-to-value ratio, usually 80–85%:
Available = (Home value × CLTV limit) − First mortgage balance
On a $450,000 home with $260,000 owed and an 85% limit, that is $382,500 − $260,000 = $122,500. Note that the available amount is far less than the $190,000 of raw equity — the lender deliberately leaves a cushion.
Home Equity Loan or HELOC
| Home equity loan | HELOC | |
|---|---|---|
| Structure | One lump sum | Revolving credit line |
| Rate | Fixed | Variable in most cases |
| Payment | Fixed from day one | Interest-only, then jumps |
| Best for | A known one-off cost | Staged or uncertain spending |
A kitchen renovation with a signed contract suits the fixed loan. A multi-phase project of uncertain cost suits the line of credit.
The Rate Advantage and What It Costs
Home equity borrowing prices well below unsecured credit — roughly 8–9% against 12–15% for a personal loan and 22–25% for credit cards. The reason is the collateral: the debt is secured by your home, and default leads to foreclosure. Converting unsecured debt into secured debt lowers the rate and raises the stakes.
Tax Deductibility Is Narrow Now
Since the 2017 tax law, interest on home equity debt is deductible only when the proceeds are used to buy, build or substantially improve the home securing the loan — and only within the overall $750,000 mortgage interest cap. Using the money for a car, tuition or debt consolidation makes the interest non-deductible.
Where It Makes Sense
- Home improvements that add value, where the interest may also be deductible.
- Consolidating high-rate debt, provided the spending behaviour that created it has changed.
- A large one-off cost — medical bills, a major repair — where the alternative is a 22% credit card.
Where it does not: ordinary consumption, vacations, or anything that leaves you with a secured debt and nothing to show for it.
Frequently Asked Questions
How much equity do I need?
Most lenders require 15–20% remaining after the new loan, so you need meaningfully more than 20% equity before borrowing is possible.
What are the closing costs?
Typically 2–5% of the loan, though many lenders waive them in exchange for a minimum holding period — repaying within three years often triggers a clawback.
Can I lose my house?
Yes. A home equity loan is secured by the property, and default can lead to foreclosure even when the first mortgage is current. This is the central risk that distinguishes it from unsecured borrowing.