Your home equity is potentially your largest source of borrowing power. Here’s how to use it wisely — and when each option makes sense.
Home Equity Loan vs HELOC: Side by Side
| Feature | Home Equity Loan | HELOC |
|---|---|---|
| How you get money | Lump sum upfront | Draw as needed (like credit card) |
| Interest rate | Fixed | Variable (usually) |
| Average rate (2026) | 8.25% | 8.50% (introductory may be lower) |
| Monthly payment | Fixed (predictable) | Variable (changes with balance + rate) |
| Repayment period | 5-30 years | 10-year draw + 20-year repayment |
| Closing costs | 2-5% of loan amount | 0-2% of credit line |
| Interest-only option | No | Yes (during draw period) |
| Tax deductible? | Yes (if used for home improvement) | Yes (if used for home improvement) |
| Best for | One-time large expense | Ongoing or uncertain costs |
How Much Can You Borrow?
| Home Value | Mortgage Balance | Available Equity (80% LTV) | Available Equity (85% LTV) |
|---|---|---|---|
| $300,000 | $200,000 | $40,000 | $55,000 |
| $400,000 | $250,000 | $70,000 | $90,000 |
| $500,000 | $300,000 | $100,000 | $125,000 |
| $600,000 | $350,000 | $130,000 | $160,000 |
| $750,000 | $400,000 | $200,000 | $237,500 |
| $1,000,000 | $500,000 | $300,000 | $350,000 |
Formula: (Home value × LTV limit) - Mortgage balance = Available equity
Cost Comparison: $75,000 Borrowed
Home Equity Loan ($75,000 at 8.25%, 15-Year Fixed)
| Item | Amount |
|---|---|
| Monthly payment | $727 |
| Total interest (15 years) | $55,860 |
| Total cost | $130,860 |
| Closing costs (3%) | $2,250 |
| All-in cost | $133,110 |
HELOC ($75,000 at 8.50% Variable, 10/20 Structure)
| Phase | Payment | Details |
|---|---|---|
| Draw period (years 1-10) | ~$531 interest-only | Minimum interest-only payments |
| Repayment period (years 11-20) | ~$814 P&I | Full principal + interest |
| Total interest (if drawn immediately, interest-only during draw) | ~$87,000 | Costs more due to slower payoff |
| If paying P&I from day 1 | ~$700/mo | Similar total cost to HE loan |
| Closing costs | $0-$750 | Often lower than HE loan |
Key insight: HELOCs cost more if you only make minimum payments during the draw period, but they’re cheaper if you’re disciplined about paying principal.
Interest Rates by Credit Score
Home Equity Loan Rates (2026)
| Credit Score | Rate Range | Rate on $100K |
|---|---|---|
| 760+ | 7.00-8.00% | ~$898/mo (15-yr) |
| 720-759 | 7.50-8.50% | ~$928/mo |
| 680-719 | 8.25-9.50% | ~$972/mo |
| 640-679 | 9.50-11.00% | ~$1,044/mo |
| 620-639 | 11.00-13.00% | ~$1,137/mo |
HELOC Rates (2026)
| Credit Score | Rate Range | Notes |
|---|---|---|
| 760+ | 7.25-8.50% | May get intro rate 1-2% lower for 6-12 months |
| 720-759 | 7.75-9.00% | Good rates available |
| 680-719 | 8.50-10.00% | Average rates |
| 640-679 | 10.00-12.00% | Limited lender options |
| 620-639 | 12.00-14.00% | Few lenders available |
When to Use Each Option
Home Equity Loan Is Better For:
| Use Case | Why |
|---|---|
| Major home renovation (known cost) | Fixed payment, predictable budget |
| Debt consolidation (credit cards) | Lock in lower fixed rate |
| One-time large purchase | Get all money at once |
| You prefer payment certainty | Fixed rate = fixed payment forever |
| You’d be tempted to overspend with open line | No revolving credit temptation |
HELOC Is Better For:
| Use Case | Why |
|---|---|
| Home renovation (uncertain/phased costs) | Draw as needed, only pay interest on what you use |
| Emergency fund backup | Available but costs nothing if unused |
| Business expenses (variable) | Flexible draws |
| You’re disciplined with credit | Won’t overborrow just because you can |
| Ongoing expenses over time | Multiple draws without re-applying |
| Rates may drop soon | Variable rate benefits when rates fall |
Tax Deductibility Rules
| Use of Funds | Tax Deductible? | Details |
|---|---|---|
| Home improvement/renovation | Yes | Interest on up to $750K total mortgage debt |
| Building an addition | Yes | Counts as home improvement |
| New roof, HVAC, kitchen remodel | Yes | Substantially improves the home |
| Debt consolidation | No | Not used to buy, build, or improve home |
| College tuition | No | Not home-improvement related |
| Vacation/general spending | No | Must be home-related |
| Investment property renovation | Yes | Deductible as investment expense |
Risks and Downsides
| Risk | Home Equity Loan | HELOC |
|---|---|---|
| Foreclosure if you default | Yes — your home is collateral | Yes — your home is collateral |
| Rate risk | None (fixed rate) | High — rates can increase significantly |
| Overspending risk | Low (one-time disbursement) | High — revolving credit temptation |
| Payment shock | None | Yes — when draw period ends, payments can double |
| Home value decline | Underwater risk if values drop | Same risk |
| Closing costs | 2-5% ($1,500-$5,000+) | Usually lower (0-2%) |
| Annual fees | None | $25-$75/year (some lenders) |
| Early termination fee | Check terms | Some charge if closed within 2-3 years |
Alternatives to Consider
| Alternative | Pros | Cons |
|---|---|---|
| Cash-out refinance | One loan, potentially better rate | Closing costs, resets mortgage term |
| Personal loan | No home at risk, fast approval | Higher rate, shorter terms |
| 401(k) loan | Borrow from yourself, low rate | Reduces retirement savings, job-loss risk |
| Credit card (0% intro) | No closing costs, 0% for 12-21 months | Rate jumps to 20%+ after intro |
| FHA 203(k) renovation loan | Finance purchase + renovation | Complex process, FHA requirements |
| Contractor financing | Convenient | Often higher rates |
Application Requirements
| Requirement | Home Equity Loan | HELOC |
|---|---|---|
| Credit score | 620+ (680+ recommended) | 620+ (680+ recommended) |
| Home equity | 15-20% after loan | 15-20% after full draw |
| DTI ratio | Under 43% | Under 43% |
| Employment | Stable 2+ years | Stable 2+ years |
| Home appraisal | Required ($300-$500) | Required or AVM |
| Documentation | Income, assets, insurance | Income, assets, insurance |
| Timeline to close | 2-6 weeks | 2-6 weeks |
| Property types | Primary, secondary, investment | Usually primary residence only |
Related: Mortgage Types | Average Home Price by City | True Cost of Homeownership | Average Closing Costs | PMI Guide