Home equity loans and HELOCs let you borrow against the value you’ve built up in your home. A home equity loan delivers a one-time lump sum at a fixed rate. A HELOC (home equity line of credit) works more like a credit card — a revolving line you can draw from as needed, usually at a variable rate. Both use your home as collateral, and current 2026 rates for prime-credit borrowers typically fall between 7.5% and 10.5% APR.
Key Takeaways
- A home equity loan gives you a single fixed-rate lump sum repaid over 5–30 years — best when you know exactly how much you need.
- A HELOC is a revolving credit line, typically with a 10-year draw period and a 20-year repayment period — best for ongoing or unpredictable expenses.
- Most lenders require at least 15–20% remaining equity after the new loan, a credit score of 680+, and a debt-to-income ratio under 43%.
- Closing costs run 2–5% of the credit line or loan amount, though many HELOC lenders waive them in exchange for a draw minimum or early-closure fee.
- Interest on home equity borrowing may be tax deductible only when funds are used to “buy, build, or substantially improve” the home that secures the loan (IRS Publication 936).
How home equity borrowing actually works
Your home equity is the difference between what your home is worth today and what you still owe on your mortgage. If your house appraises at $500,000 and your mortgage balance is $300,000, you have $200,000 of equity. Most lenders will let you borrow against up to 80–85% of the home’s value in total (mortgage + new home equity debt), so in this example, you could borrow roughly $100,000–$125,000 against your equity.
Two products tap that equity in very different ways:
- Home equity loan (a “second mortgage”): You receive the full loan amount up front, in cash, and start repaying principal and interest immediately on a fixed schedule. Rates are fixed for the life of the loan, which makes monthly payments predictable.
- HELOC: The lender approves a credit limit (say, $100,000) that you draw from over a defined draw period — usually 10 years. During the draw period, you typically pay only interest on the amount you’ve borrowed. When the draw period ends, you enter a repayment period (commonly 20 years) where you pay back principal and interest on whatever balance remains.
HELOC rates are usually tied to the prime rate plus a margin, so your payment moves up or down when the Federal Reserve changes its target rate. A fixed-rate HELOC option exists at some lenders and lets you lock in a portion of your balance at a fixed rate during the draw period.
When a home equity loan or HELOC actually makes sense
Home equity borrowing is one of the lowest-cost ways for homeowners to borrow large amounts of money, because the loan is secured by your home. But the same collateral means default puts your home at risk. These are the situations where the trade-off most often works in your favor:
- Significant home improvements — projects that add long-term value (kitchen, bathroom, additions). Interest may also be tax deductible.
- Debt consolidation — replacing high-interest credit card debt (20%+ APR) with secured debt around 8–10% APR can sharply lower total interest paid. Only worth it if you stop accumulating new card debt.
- Major one-time expenses — tuition, medical bills, business launch capital — when the alternative is a higher-rate personal loan or credit card.
- Ongoing renovations — a HELOC’s “draw as you need” model fits multi-phase projects where you don’t know the total cost up front.
It’s almost never a good fit for everyday spending, vacations, or speculative investments. If you can’t pay the loan back, you can lose your home.
How to compare home equity lenders
Three numbers matter more than any marketing claim:
- APR, not just interest rate. APR includes lender fees, so it’s the only apples-to-apples figure between two offers.
- Combined loan-to-value (CLTV) maximum. Lenders with higher CLTV caps (90% or even 95% in rare cases) let you borrow more against the same home. Most cap at 85%.
- Fees. Application fees, appraisal fees, annual fees, early-closure fees, inactivity fees on HELOCs. A “no closing cost” HELOC often hides an early-closure fee charged if you pay off the line within 3 years.
Beyond pricing, look at: how quickly the lender funds (some online lenders close in 5 business days; banks often take 30–45), whether they offer a fixed-rate HELOC option, and whether they require a minimum draw at closing.
See the 2026 best HELOC lenders →
State-specific guides
State law affects what lenders can charge, recording fees, and homestead protections. Start with your state’s guide for local lender availability and tax treatment:
Going deeper
Frequently asked questions
How much home equity can I borrow?
Most lenders cap your combined mortgage and home equity debt at 80–85% of your home’s appraised value. If your home is worth $400,000 and you owe $250,000 on your mortgage, your maximum total debt would be roughly $320,000–$340,000 — leaving $70,000–$90,000 of new home equity borrowing capacity. A handful of lenders go to 90% combined loan-to-value for borrowers with strong credit, but the rate is usually higher.
What credit score do I need for a HELOC or home equity loan?
Most lenders require a minimum FICO score of 680 for their advertised rates, though some accept scores down to 620 with offsetting strengths (lower CLTV, higher income). The lowest advertised rates typically require 740+. A handful of credit unions and HELOC specialists work with scores in the high 500s, but expect rates 3–5 percentage points above the standard published rate.
Is HELOC interest tax deductible?
Under the Tax Cuts and Jobs Act, interest on home equity debt is deductible only when the funds are used to buy, build, or substantially improve the home that secures the loan (per IRS Publication 936). HELOC funds used to consolidate credit card debt, pay tuition, or cover medical bills are not deductible. The total mortgage + home equity debt eligible for deduction is also capped at $750,000 for loans originated after December 15, 2017. Consult a tax professional for your specific situation.
How long does HELOC approval take?
Online HELOC lenders typically close in 5–10 business days. Traditional banks and credit unions usually take 3–6 weeks because of slower appraisal scheduling and underwriting. The biggest variables are how quickly the appraisal is completed and how complete your documentation is at application — recent paystubs, two years of tax returns, mortgage statement, and homeowner’s insurance declarations page.
HELOC vs. home equity loan — which should I pick?
Pick a home equity loan when you know exactly how much you need, want a predictable monthly payment, and prefer rate certainty (especially in a rising-rate environment). Pick a HELOC when expenses will roll out over months or years (multi-stage renovation), when you want the flexibility to draw and repay multiple times, or when you only want to pay interest on what you’ve actually used. Many borrowers use both: a home equity loan for the known portion of a project and a HELOC for cost overruns.
Can I get a HELOC on an investment property or second home?
Yes, but fewer lenders offer them and the terms are stricter. Expect a maximum CLTV of 65–75% (vs. 80–85% on primary residences), a credit score requirement of 720+, and an interest rate 0.5–1.5 percentage points higher. See our HELOC on investment property guide for the specific lenders that accept non-owner-occupied applications.
What’s the difference between a HELOC and cash-out refinance?
A cash-out refinance replaces your entire existing mortgage with a new, larger one and pays you the difference in cash. A HELOC leaves your existing mortgage alone and adds a second lien on top. Cash-out refis usually have lower rates than HELOCs but higher closing costs and reset your full mortgage clock. HELOCs are typically the better choice if you have a low locked-in rate on your existing mortgage that you don’t want to give up.
Written and fact-checked by the TopMoneyHub Editorial Team. Rates and lender data verified May 2026.
