Key takeaways
- Home equity is your home’s market value minus what you still owe. On a $400,000 home with a $250,000 mortgage, that’s $150,000 in equity — but you can’t borrow it all.
- Most lenders cap borrowing at 80–85% of the home’s value (combined LTV). At 80% CLTV, the most you could add to that $250,000 balance is $70,000.
- A home equity loan gives you a lump sum at a fixed rate (8.00% → $606.64/mo for 10 years in this example).
- A HELOC is a variable-rate line of credit: flexible draws, lower early payments, but the rate can rise and the payment jumps when repayment starts.
- Both use your home as collateral. Default means foreclosure.
When you’ve been paying a mortgage for years, you’ve built up a cushion between what your home is worth and what you owe. That cushion is your equity, and two products let you borrow against it: a home equity loan and a home equity line of credit (HELOC). They work very differently, and the right choice depends on how you need the money and how much payment uncertainty you can absorb.
What home equity is
Home equity is the difference between your home’s current market value and every lien on it — your first mortgage, any second mortgage, and any existing HELOC balance.
Equity = Home value − All liens
For a $400,000 home with a $250,000 first mortgage and no other liens: $400,000 − $250,000 = $150,000. That $150,000 is not all accessible. Lenders won’t let you borrow down to zero equity because a small market dip would leave them underwater. That’s where CLTV comes in.
The CLTV rule — how lenders cap what you can borrow
Combined loan-to-value (CLTV) is the share of the home’s value covered by all liens combined, including any new borrowing:
CLTV = (Existing liens + New borrowing) ÷ Home value
Lenders typically set a ceiling of 80–85% CLTV, though some go a few points higher for well-qualified borrowers and some go lower in volatile markets. At 80%:
Max new borrowing = $400,000 × 80% − $250,000 = $70,000
If you borrow the full $70,000, your CLTV hits exactly 80% and your remaining equity drops to $0. If you borrow only $50,000, your CLTV after is 75.00% and your remaining equity is $100,000.
Home equity loan: fixed rate, lump sum
A home equity loan works like a personal loan secured by your home: you borrow a fixed amount, at a fixed rate, and repay it in equal monthly installments over a fixed term (typically 5–30 years).
For $50,000 at 8.00% for 10 years:
- Monthly payment: $606.64
- Total interest: $22,797
- Total paid: $72,797
The payment never changes. That predictability makes a home equity loan a good fit for one-time, known expenses — a kitchen renovation with a firm budget, paying off a car, consolidating a fixed debt load.
HELOC: variable rate, revolving line
A home equity line of credit behaves more like a credit card secured by your home. The lender approves a credit limit based on your equity and CLTV. During the draw period (often 10 years) you can borrow and repay repeatedly, up to the limit. The minimum payment during this period is usually interest only on what you’ve drawn — so early payments are low.
When the draw period ends, the repayment period begins (often 10–20 years). You can no longer draw, and the outstanding balance amortizes over the remaining term. The payment jumps, sometimes significantly. The CFPB calls this “payment shock,” and it catches many borrowers off guard.
The rate on a HELOC is variable: typically tied to the prime rate plus a margin. If the prime rate rises by 2 percentage points, your rate rises by the same amount. Lifetime rate caps limit how high the rate can go, but they are usually set high (15–18% is common).
A HELOC costs less in interest if you draw the money gradually, repay some of it early, and the rate stays flat or falls. If you need the full amount up front and rates are expected to rise, the fixed-rate home equity loan usually wins. Use the calculator to model both scenarios with your numbers.
A worked example: $400,000 home, $250,000 mortgage, $50,000 draw
Home value: $400,000. First mortgage balance: $250,000. You want to borrow $50,000.
Step 1 — Available equity: $400,000 − $250,000 = $150,000.
Step 2 — CLTV check at 80%: max new borrowing = $70,000. Borrowing $50,000 is within the limit; CLTV after = 75.00%.
Home equity loan path (8.00%, 10 years):
| Monthly payment | $606.64 |
| Total interest | $22,797 |
| Total paid | $72,797 |
HELOC path (8.50%, 10-year draw period / 20-year repayment, interest-only during draw):
- Draw period minimum payment (interest only): $354.17/mo
- Repayment period: the full $50,000 balance amortizes over 20 years — the payment rises sharply.
- Total interest depends on how much you draw, when you repay, and where the rate goes.
The loan gives you certainty: one number to budget. The HELOC gives you flexibility: borrow $10,000 now for a first phase and $20,000 next year for the second, paying interest only on what you’ve actually drawn.
Common uses
Renovations are the most common use. Funded improvements can raise the home’s value, though not every dollar spent comes back at sale. A HELOC suits staged projects; a home equity loan suits a single contractor with a fixed quote.
Debt consolidation can lower the rate you pay on high-interest credit cards, but you’re converting unsecured debt into debt secured by your home. If you can’t pay the resulting bill, you risk losing the house — not just your credit score.
Emergencies and reserves. A HELOC you never draw on costs nothing and gives you a credit line to tap if income stops. Some homeowners open one while they still qualify rather than waiting for an emergency.
Key risks
Foreclosure. Your home is the collateral. Missing payments on a home equity loan or HELOC puts your home at risk, just as missing a first-mortgage payment does.
Variable-rate exposure (HELOC). A HELOC tied to prime can see its rate double in a rising-rate environment. The CFPB’s HELOC brochure walks through rate-change scenarios you should model before signing.
Payment shock (HELOC). The jump from an interest-only draw-period payment to a fully amortizing repayment payment can be two to three times the earlier amount. Build that number into your budget before you open the line.
Over-borrowing. Easy access to a large credit line tempts some borrowers into spending that erodes their equity and leaves them unable to sell or refinance if the market dips.
To compare a home equity loan and a HELOC for your exact numbers — including rate-change scenarios and the full monthly schedule — use the home equity calculator.