Home Equity
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Understanding home equity and how to use it.

Home equity is the difference between your home's current market value and the amount you still owe on your mortgage. As you pay down your mortgage and your property appreciates, your equity grows. You can tap into that equity through a HELOC or a home equity loan to fund renovations, consolidate debt, or cover major expenses.

HELOC vs. home equity loan

Both let you borrow against your equity, but they work differently:

• Home equity loan: A lump sum at a fixed interest rate with fixed monthly payments over a set term. Best for one-time expenses like a kitchen renovation or paying off high-interest debt.
• HELOC: A revolving line of credit with a variable rate. You draw what you need during a draw period (typically 5-10 years), then repay over a repayment period. Best for ongoing projects or expenses with uncertain totals.
• Interest rates: Home equity loans typically carry fixed rates. HELOCs usually have variable rates tied to the prime rate, meaning your payment can change over time.

How LTV works

Loan-to-value (LTV) is the ratio of total debt on your home to its appraised value. Lenders use a maximum combined LTV to determine how much you can borrow. If your home is worth $400,000, your mortgage balance is $250,000, and the lender allows 85% LTV, your maximum combined debt is $340,000 — meaning you can borrow up to $90,000 in additional equity. Lower LTV ratios typically qualify you for better interest rates.

When to use home equity

Tapping your equity makes sense when the use of funds will increase your financial position or your home's value. Common uses include home improvements that boost resale value, consolidating high-interest debt into a lower rate, funding education, or covering emergency expenses. The interest may even be tax deductible if the funds are used to improve the home securing the loan — consult a tax professional.

Risks to consider

Borrowing against your home means your home is the collateral. If you cannot make payments, the lender can foreclose. Variable-rate HELOCs can see payment increases if interest rates rise. Borrowing too much can also leave you "underwater" if property values decline. Before taking out an equity loan, make sure the monthly payment fits comfortably in your budget and that you have a clear plan for the funds. Understand all closing costs and fees before committing.

How your credit score affects home equity borrowing

Your credit score is one of the most important factors in qualifying for a HELOC or home equity loan. It determines both eligibility and rate:

• Excellent (720-850): Best rates available. Most lenders will offer their lowest advertised rates. You'll have the widest selection of products.
• Good (690-719): Slightly higher rates — typically 0.25-0.50% above the best rates. Still a wide range of lender options.
• Fair (630-689): Expect rates 1-2% higher than excellent. Fewer lenders will approve. Some may require lower LTV limits (75% instead of 85%).
• Below average (300-629): Most traditional lenders will deny the application. Consider credit-building strategies before applying, or explore alternative lending options.

Home equity requirements: what lenders look for

Beyond credit score and equity, lenders evaluate several factors to determine eligibility:

• Minimum 15-20% equity: Most lenders want you to retain at least 15-20% equity in the home after borrowing. This means a combined LTV of 80-85%.
• Debt-to-income ratio under 43%: Your total monthly debt payments (including the new equity loan) must stay below 43% of gross monthly income. Use our DTI calculator to check.
• Stable income and employment: Lenders verify your income can support the additional payment. Expect to provide pay stubs, tax returns, and bank statements — similar to mortgage pre-approval documents.
• Current on mortgage payments: Late payments on your primary mortgage are a red flag. Most lenders require 12+ months of on-time payments.
• Acceptable property condition: The lender may require an appraisal to confirm the home's current market value supports the combined loan amount.

How to build home equity faster

The more equity you have, the more you can borrow and the better terms you'll receive. Here are proven strategies:

• Make extra mortgage payments: Even $100/month extra toward principal accelerates equity growth dramatically. See our mortgage payoff calculator to quantify the impact.
• Choose a shorter loan term: A 15-year mortgage builds equity roughly twice as fast as a 30-year.
• Make a larger down payment: Starting with 20%+ means you have equity from day one and avoid PMI.
• Home improvements: Strategic renovations (kitchens, bathrooms, curb appeal) increase market value. Avoid over-improving for the neighborhood.
• Wait for appreciation: In most markets, home values increase 3-5% annually. Time is your ally — a $400,000 home grows to $464,000 in 5 years at 3% appreciation.

Is home equity loan interest tax deductible?

Interest on home equity loans and HELOCs is tax deductible only if the funds are used to buy, build, or substantially improve the home that secures the loan. Under the Tax Cuts and Jobs Act, the combined mortgage and home equity debt limit for interest deduction is $750,000 (or $375,000 for married filing separately). If you use the funds for other purposes — debt consolidation, education, a vacation — the interest is not deductible. Consult a tax professional for your specific situation. See our capital gains tax calculator for related tax considerations.

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Everything you need to understand home equity, HELOCs, and equity loans.

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