What home equity is and why it matters when you need cash

Home equity is the difference between what your home is worth and what you still owe on your mortgage. If your house is worth $200,000 and you owe $120,000, you have $80,000 in equity. That equity can be borrowed against — meaning you can use it to get cash for emergencies, repairs, medical bills, or other needs. For lower-income homeowners, this can feel like a lifeline when unexpected costs hit.

The catch is that borrowing against your home puts your home at risk. If you cannot repay the loan, the lender can foreclose. This is different from credit card debt or personal loans, where the worst outcome is damage to your credit. With home equity, you are literally betting your house. That is why using it responsibly — understanding the real costs, comparing your options, and knowing when not to borrow — matters more than the marketing around these products suggests.

Key Takeaways

  • Home equity loans and lines of credit let you borrow money using your house as collateral, but defaulting can result in foreclosure.
  • A home equity loan gives you a lump sum with a fixed interest rate and payment; a HELOC gives you a credit line you draw from as needed, with a variable rate.
  • Interest rates on home equity products are usually lower than credit cards or personal loans because the lender has your house as security.
  • Lenders typically let you borrow up to 80 to 85 percent of your home's value minus what you owe, but borrowing the maximum leaves little cushion if your home value drops.
  • Before borrowing, explore whether grants, assistance programs, or lower-cost repairs might solve the problem without putting your home at risk.

Home equity loans versus HELOCs: which structure fits your situation

A home equity loan works like a second mortgage. You borrow a fixed amount in one lump sum, receive it as cash, and repay it over a set term — usually 5 to 15 years — with a fixed interest rate. Your monthly payment stays the same for the life of the loan. This structure is predictable: you know exactly what you owe each month and when the debt ends.

A HELOC (home equity line of credit) works more like a credit card. The lender approves you for a maximum amount — say, $50,000 — and you can draw from it as you need the money. During the "draw period," usually 5 to 10 years, you pay interest only on what you have actually borrowed. After the draw period ends, you enter a "repayment period" where you can no longer borrow and must repay the balance, often with a higher payment. Interest rates on HELOCs are variable, meaning they can rise or fall with market conditions.

For lower-income households, a home equity loan is often the safer choice. You get the money you need upfront, you know your payment, and you are not tempted to keep borrowing. A HELOC can spiral: the low initial payments feel manageable, but when the repayment period hits and rates have risen, the payment can jump sharply. If you are already tight on cash, that shock can push you toward default.

How lenders decide how much you can borrow

Lenders use your home's current market value and your existing mortgage balance to calculate how much equity you can access. Most will lend up to 80 or 85 percent of your home's value, minus what you still owe. If your home is worth $150,000 and you owe $80,000, a lender offering 80 percent LTV (loan-to-value) would let you borrow up to $40,000 ($150,000 × 0.80 − $80,000).

The reason lenders stop at 80 or 85 percent is protection: if your home value drops or you default and they have to foreclose and sell, they want enough cushion to cover their loss. Borrowing right up to the maximum leaves you exposed. If your home value falls 10 percent, you could end up owing more than the house is worth — a situation called being "underwater" — and you would be trapped unable to sell or refinance without bringing cash to closing.

Lenders also look at your credit score, income, and debt-to-income ratio. Lower-income borrowers may face higher interest rates or stricter limits, or may not may have access to at all. It is worth shopping with multiple lenders: rates and terms vary, and a credit union or community bank may offer better terms than a national lender.

The real cost of borrowing against your home

Home equity loans and HELOCs carry lower interest rates than credit cards or personal loans — often 2 to 4 percentage points lower — because the lender holds your house as security. That lower rate is real and can save you money. But the lower rate also makes it easy to underestimate the total cost.

A $20,000 home equity loan at 7 percent over 10 years costs about $23,600 total — $3,600 in interest. A $20,000 personal loan at 12 percent over the same term costs about $26,800 — $6,800 in interest. The home equity loan saves you $3,200. But that $20,000 is now a second lien on your house. If you miss payments, the lender can foreclose. With the personal loan, your credit suffers and the lender can sue, but your house is safe.

Closing costs on a home equity loan typically run 2 to 5 percent of the amount borrowed — $400 to $1,000 on a $20,000 loan. Some lenders advertise "no closing cost" loans, but the cost is usually built into a higher interest rate. Factor closing costs into your decision: if you are borrowing $5,000 for a one-time repair, a $200 to $250 closing cost is a bigger percentage of the total than if you are borrowing $50,000.

When borrowing against your home makes sense

Home equity borrowing is most responsible when you are solving a problem that increases your home's value or prevents larger losses. A roof repair, foundation work, or major plumbing fix fits this category: you are spending money you would have to spend anyway, and you are using a lower-cost borrowing method. If you have high-interest credit card debt and can refinance it into a home equity loan at a much lower rate, that can also make sense — but only if you commit to not running up the credit cards again.

Home equity borrowing is also reasonable for education or job training that will increase your earning power, or for a medical emergency where the alternative is defaulting on other debts. The key is that you have a plan to repay: you understand the monthly payment, you have confirmed it fits your budget, and you have thought through what happens if your income drops.

Borrowing against your home to fund a lifestyle you cannot otherwise afford — a vacation, a car, or general cash flow — is the opposite of responsible. You are putting your house at risk for something that does not increase its value or your ability to repay. If your monthly budget does not work without borrowing, borrowing will not fix it; it will only delay the problem and add risk.

Alternatives to explore before you borrow

Before you take out a home equity loan, check whether you have other options. If you need money for a home repair, look for grants or rebates from your city or state. Many municipalities offer funds for weatherization, lead paint removal, or accessibility upgrades for older adults or people with disabilities. The Department of Energy and your state's housing finance agency can point you toward these programs.

If you are struggling with credit card debt, contact the creditors directly and ask about hardship programs. Many will lower your interest rate or pause payments if you explain your situation. Non-profit credit counseling agencies (look for those certified by the National Foundation for Credit Counseling) offer free or low-cost debt management plans that can reduce your interest rate without putting your home at risk.

If you need cash for an emergency, check whether you have a 401(k) or IRA. Borrowing from your own retirement account avoids a lender entirely, though it does reduce your retirement savings. Some employers offer emergency loans or advances on your paycheck. A personal loan from a credit union (if you are a member) often carries better terms than a bank or online lender. These options do not put your home at risk.

Protecting yourself from predatory lenders

Home equity lending attracts predatory operators who target lower-income and older homeowners. Red flags include: pressure to close quickly, promises that sound too good to be true, lenders who do not clearly explain the terms, requests to sign blank documents, or suggestions that you lie on the application about your income or the purpose of the loan.

Legitimate lenders provide a Loan Estimate within three business days of your application. This document shows the interest rate, monthly payment, closing costs, and all other terms. You have the right to shop around and take time to decide. If a lender rushes you or refuses to provide clear written terms, walk away.

Work with lenders that are licensed and regulated in your state. You can verify a lender's license through your state's banking regulator or the Nationwide Multistate Licensing System. Ask for references and check online reviews, but remember that unhappy borrowers are more likely to leave reviews than satisfied ones. If you are unsure, ask a trusted friend, family member, or a non-profit housing counselor to review the terms before you sign.

What happens if you cannot repay

If you miss payments on a home equity loan or HELOC, the lender will contact you. Most will work with you if you reach out early: they may offer a temporary payment reduction, a forbearance period, or a loan modification. The key is to communicate before you fall behind, not after.

If you fall significantly behind — typically 120 days or more — the lender can begin foreclosure. This process varies by state but usually takes several months. You have the right to bring the loan current at any point during foreclosure, and you may have the right to a hearing. Some states allow you to "redeem" the property even after a foreclosure sale by paying the full amount owed plus costs.

If you are struggling to make payments, contact a HUD-approved housing counselor immediately. These counselors are free and can help you understand your options, negotiate with your lender, or explore loan modification. You can find one through the HUD website or by calling 1-800-569-4287.

Frequently Asked Questions

Can I get a home equity loan if I have bad credit?

Some lenders work with lower credit scores, but you will likely face a higher interest rate and may need to borrow less than someone with good credit. Credit unions and community banks are sometimes more flexible than national lenders. Improving your credit score before you apply — by paying down existing debt or correcting errors on your credit report — can lower your rate.

What is the difference between a home equity loan and a cash-out refinance?

A cash-out refinance replaces your entire mortgage with a new, larger one and gives you the difference in cash. A home equity loan is a second loan on top of your existing mortgage. Refinancing can make sense if interest rates have dropped and you can get a better rate overall, but it resets your loan term and you pay closing costs again. A home equity loan keeps your original mortgage unchanged.

If I borrow against my home, do I lose the homeowner tax deduction?

You can still deduct mortgage interest on your primary residence, but the rules changed in 2017. You can deduct interest on up to $750,000 in total mortgage debt (including home equity loans). If you borrow more than that, the interest on the excess is not deductible. Talk to a tax professional about your specific situation.

What if my home value drops after I borrow against it?

You still owe the full amount you borrowed, even if your home is now worth less. This is why borrowing close to the maximum is risky. If you end up owing more than your home is worth, you cannot easily sell or refinance. You are committed to repaying the loan regardless of your home's value.

Can I use a home equity loan to pay off other debts?

Yes, and it can save money if the home equity rate is much lower than your credit card or personal loan rates. But only do this if you have a plan to avoid running up debt again. Many people consolidate debt into a home equity loan, then accumulate new credit card debt on top of it, ending up worse off.