If you own a home that has gained value, a home equity loan lets you borrow against that equity at much lower rates than personal loans or credit cards. Here’s how it works.
What a home equity loan is
A home equity loan lets you borrow a lump sum using your home’s equity (the value of your home minus what you still owe on the mortgage) as collateral. You receive the money at once, repay it in fixed monthly installments over a set period (usually 5–30 years), at a fixed interest rate.
Example: Your home is worth $400,000. You owe $250,000 on the mortgage. You have $150,000 in equity. Most lenders allow you to borrow up to 80–85% of your total home value minus your mortgage — so you could access roughly $70,000–$90,000.
Home equity loan vs HELOC
- Home equity loan: Lump sum at a fixed rate. Predictable monthly payments. Good for one-time expenses.
- HELOC (Home Equity Line of Credit): Works like a credit card — draw what you need when you need it, up to a limit. Variable rate. Good for ongoing expenses or projects with uncertain costs.
Good uses for a home equity loan
- Home improvements that increase property value (kitchen, bathroom, additions)
- Debt consolidation — replacing 20%+ credit card debt with a 7–9% home equity loan
- Major necessary expenses (medical bills, education)
Bad uses for a home equity loan
- Vacations, luxury purchases, or discretionary spending
- Investing in volatile assets (stocks, crypto) — if the investment drops, you still owe the loan backed by your home
- Covering living expenses from overspending — borrowing against your home to fund a lifestyle you can’t afford is a path to losing it
The critical risk
Your home is the collateral. If you default on a home equity loan, the lender can foreclose. This is a fundamentally different risk level than a personal loan or credit card default. Never borrow against your home for anything you wouldn’t be willing to lose the house over. The low interest rate comes with this very real downside.