What home equity is and why it matters

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. For lower-income homeowners, this equity is often the largest asset they own — sometimes the only one — and lenders will let you borrow against it. The catch is that you are putting your home at risk to access that money.

Borrowing against home equity is cheaper than credit cards or personal loans because the lender has a claim on your house if you do not repay. That lower interest rate is real, but it comes with a real cost: if you cannot make payments, you can lose your home. This is not theoretical. Foreclosure happens, and it happens fastest to people who borrowed against equity they could not afford to repay.

Lower-income households sometimes turn to home equity borrowing because other credit is too expensive or unavailable. That makes sense on paper — a 7 percent home equity loan beats a 24 percent credit card. But the math only works if you can actually afford the payments, and if the reason you need to borrow does not happen again next year.

Key Takeaways

  • Home equity is the difference between your home's value and your mortgage balance, and you can borrow against it through a home equity loan or line of credit.
  • Home equity loans have lower interest rates than credit cards or personal loans because your home secures the debt — meaning foreclosure is the lender's remedy if you stop paying.
  • Borrowing against equity makes sense only if you can afford the new monthly payment and the reason you need to borrow is not a recurring problem.
  • A home equity line of credit (HELOC) lets you borrow as needed and pay interest only on what you use, but rates can rise and lenders can freeze the line if your home value drops.
  • Before borrowing, explore whether the money is for a one-time need (home repair, medical debt) or a sign that your household budget is broken and needs fixing first.

Home equity loans versus lines of credit

There are two main ways to borrow against equity: a home equity loan and a home equity line of credit (HELOC). A home equity loan works like a second mortgage. You borrow a lump sum, receive it all at once, and repay it in fixed monthly payments over a set term — usually 5 to 15 years. Your interest rate is fixed, so your payment never changes. This is predictable, which matters if your income is unstable.

A HELOC is more like a credit card backed by your home. The lender approves you for a maximum amount you can borrow — say, $30,000 — and you draw from it as you need it. You pay interest only on what you actually use. During the "draw period" (usually 5 to 10 years), you can borrow and repay repeatedly. After that, the line closes and you enter a "repayment period" where you pay down the balance but cannot borrow anymore. Interest rates on HELOCs are usually variable, meaning they can rise if the market rate rises.

For lower-income households, a fixed-rate home equity loan is often safer than a HELOC. You know exactly what your payment will be. With a HELOC, your payment can jump if rates rise, and the lender can freeze or reduce your line if your home value falls or your credit score drops. During the 2008 housing crisis, many people lost access to their HELOCs overnight when home values crashed.

What it actually costs to borrow

Interest rate is only part of the cost. Home equity loans and HELOCs come with closing costs — appraisal fees, title search, underwriting, and origination fees. These typically run 2 to 5 percent of the loan amount. On a $30,000 loan, that is $600 to $1,500 out of pocket or rolled into the loan balance. If you roll it in, you pay interest on it for years.

Some lenders advertise "no closing cost" loans, but the cost does not disappear — it gets built into a higher interest rate. You will pay more over time. Always ask the lender for a Loan Estimate, which is a standardized form that shows the interest rate, monthly payment, all fees, and the total amount you will pay back. Federal law requires lenders to give you this before you commit.

There is also an invisible cost: opportunity cost. If you borrow $20,000 at 7 percent over 10 years, you will pay roughly $7,000 in interest alone. That money could have gone to an emergency fund, retirement savings, or paying down higher-interest debt. Before you borrow, ask whether the thing you are buying or paying for will actually improve your financial position, or whether it just moves money around.

When home equity borrowing makes sense

Home equity borrowing is most defensible when the money goes toward something that increases your home's value or your earning power, and when you have a stable way to repay. A roof repair, foundation work, or kitchen renovation that raises your home's resale value is a legitimate use. So is paying off high-interest credit card debt — but only if you then stop using the credit cards, because if you run them back up, you now have two debts instead of one.

Borrowing to cover a one-time medical bill, emergency car repair, or job loss makes sense if you have a clear plan to repay and the problem will not recur. If you are borrowing because your household spends more than it earns every month, borrowing against your home does not fix that problem — it just adds a payment you cannot afford to the list of payments you cannot afford.

Be especially cautious if you are borrowing to cover living expenses, pay off personal loans, or fund a business. These are signs that your cash flow is broken. Borrowing against your home will not fix it, and if the business fails or the cash flow problem continues, you will be at risk of foreclosure.

How lenders decide how much you can borrow

Lenders use a formula called loan-to-value (LTV) to decide how much equity you can access. They typically allow you to borrow up to 80 to 90 percent of your home's value, minus what you still owe on your mortgage. If your home is worth $200,000 and you owe $100,000, you have $100,000 in equity. At 80 percent LTV, you could borrow up to $60,000 (80 percent of $200,000 is $160,000, minus the $100,000 you owe).

The lender will order an appraisal to determine your home's current value. This costs $300 to $500 and you usually pay for it upfront. If the appraisal comes in lower than you expected, the amount you can borrow shrinks. If your home is in an area where values have fallen, you might have less equity than you think.

Lenders also look at your credit score, income, and debt-to-income ratio. If your credit is poor or your income is irregular, you may not may have access to at all, or you may only may have access to at a higher interest rate. Some lenders specialize in borrowers with lower credit scores, but they charge more — sometimes significantly more. Always compare offers from multiple lenders before accepting.

Risks specific to lower-income homeowners

Lower-income households face particular risks when borrowing against home equity. If your income is unstable — seasonal work, gig work, or a job with variable hours — a fixed monthly payment can become unaffordable quickly. Unlike credit card debt, which you can pause or reduce, a home equity loan payment is mandatory. Miss it, and foreclosure proceedings can begin within months.

Home values can also fall, especially in lower-income neighborhoods. If your home loses value and you have borrowed heavily against it, you can end up "underwater" — owing more than the home is worth. This traps you: you cannot sell without taking a loss, and you cannot refinance because the lender will not lend more than the home is worth. If you then lose your job or face a major expense, you have no exit.

Predatory lenders specifically target lower-income homeowners. They offer easy approval, no credit check, and fast funding — and then charge rates and fees that make the debt unsustainable. If a lender is pushing you to borrow more than you planned, or if they are vague about fees and rates, walk away. There are other options.

Alternatives to borrowing against your home

Before you borrow against equity, explore whether the money is truly necessary or whether you are solving a symptom instead of a problem. If you need money for an emergency, look first at whether you can reduce expenses, pick up temporary work, or ask for help from family. These are not pleasant options, but they do not put your home at risk.

If you need to consolidate debt, a personal loan from a credit union or bank may be cheaper than you think, especially if you have a member or employee relationship. Credit unions often offer rates lower than home equity loans for borrowers with modest credit. A nonprofit credit counselor can also help you negotiate with creditors to lower payments or interest rates without borrowing at all.

If the money is for a home repair, look for local programs that offer grants or low-interest loans specifically for home improvement. Many cities and counties run these programs for lower-income homeowners. The Community Development Block Grant (CDBG) program, administered through your city or county, sometimes funds repairs. Your local housing authority or community action agency can tell you what is available in your area.

Questions to ask yourself before borrowing

Before you apply for a home equity loan or line of credit, write down honest answers to these questions: Why do I need this money? Is this a one-time need or a sign of a recurring problem? Can I afford the monthly payment if my income drops 20 percent? What will I do if I cannot make a payment? Do I have a plan to repay this, or am I just hoping things improve?

If you cannot answer these questions confidently, do not borrow. Talk to a nonprofit credit counselor first — they are free or low-cost and can help you figure out whether borrowing makes sense or whether you need a different strategy. The National Foundation for Credit Counseling (NFCC) and the Financial Counseling Association (FCA) both have counselors you can reach by phone or video.

Frequently Asked Questions

Can I borrow against my home if I still have a mortgage?

Yes. A home equity loan or HELOC is a second lien on your home, meaning it sits behind your mortgage. The mortgage lender has first claim if you default. You can borrow as long as you have equity — the difference between your home's value and what you owe on the mortgage.

What happens to my home equity loan if I sell my house?

You must repay the full balance from the sale proceeds before you receive any money. If you owe $100,000 on your mortgage and $20,000 on a home equity loan, and you sell for $180,000, the lender gets paid first and you walk away with roughly $60,000 (after realtor fees and other costs).

Can a lender freeze my HELOC?

Yes. If your home value drops, your credit score falls, or you miss payments, the lender can reduce or freeze your line of credit. This happened widely during the 2008 housing crisis. A fixed-rate home equity loan cannot be frozen — you keep the money and the payment stays the same.

Is the interest on a home equity loan tax-deductible?

Only if you use the money to buy, build, or improve your home. Interest on a home equity loan used for other purposes — paying off credit cards, medical bills, or living expenses — is not deductible. Ask a tax professional about your specific situation.

What if I cannot afford the payment after I borrow?

Contact your lender immediately. Some offer forbearance (temporary payment pause) or loan modification. Do not ignore the problem. Foreclosure can begin after one or two missed payments, and it moves faster than most people expect. A nonprofit housing counselor can also help you negotiate with the lender.