Learn how to tap into the equity that you have in your home for goals such as paying bills, paying off another loan, or funding a project.

The Top Line

  • Home equity lines of credit are very commonly used by anyone in need of funding for large projects.
  • Anyone that has paid a particular amount of their original principal can become eligible to take out a home equity loan.
  • There are several options of home equity loans to choose from. Choosing the right one for your situation is essential to getting the most out of your loan.

Have you been thinking of making improvements to your home, financing a large project, or getting help with your expenses? If so, then you may have heard of home equity loans as an opportunity. A home equity loan opens up access to capital that would otherwise be locked up in the value of your home. However, if you are going to pursue a home equity loan, there are a few things that you will want to know beforehand. Knowing everything about a home equity loan is essential to ensuring that you get a good deal and that you don’t overextend yourself when looking for a loan to finance your home improvement project or other financial need.

What is a Home Equity Loan?

The first thing that you will need to know is what exactly a home equity loan is. Having success in the home equity loan process depends on having a good understanding of what exactly you are doing when you take out a home equity loan. A home equity loan is a vehicle that utilizes the equity that you have built in your home to give you access to cash. The funds may be used for any purpose including paying off debt, household expenses, college expenses, or for a home improvement project.

To calculate how much of a loan you will be eligible for, a simple math calculation is executed. The amount of equity that you have in your home is the difference between the value of the home and the amount that is owed on it. The result is the amount of the home that you own and that you have paid for. A home equity loan uses this amount to collateralize the loan and provide you with access to capital quickly.

Who is Eligible for a Home Equity Loan?

Technically, anyone who owns a home can qualify for a home equity loan. However, this isn’t practical for everyone. First, you will need to have built significant equity in the home. The bank will make the final decision as to whether you are granted a home equity loan or not, but they are unlikely to consider it unless you have built a significant amount of equity to draw from. Otherwise, it is often not worth the time of anyone involved.

If you have built up equity in your home suitable for consideration for a home equity loan, the next thing that the bank will want to see is your credit history and your record for making your payments. They will ensure that you are in good standing with the loan and that you have had no life events that would affect your ability to pay the loan and continue to make progress. They will also want to see that your income is sufficient for the added burden of a home equity loan. With these factors in consideration, a bank can issue a final approval or disapproval.

What Are the Types of Home Equity Loans?

One of the most important things to know about home equity loans is that there are two basic types. Being familiar with these two kinds of home equity loans will help you choose the one that is best for you.


HELOC is an acronym for Home Equity Line of Credit. This is the first type of home equity loan that is available to you. This acts more like a credit account or credit card, giving you the freedom to draw from it at almost any time. The bank will approve you for a capped amount, much in the same way that a credit card would approve you for a credit card with a maximum limit.

Fixed-Rate Loan

The second type of home equity loan is a fixed-rate loan. This is a one-time loan that is approved by the bank and it is to be paid back at a fixed rate, determined at the time that the loan is taken out. A fixed-rate loan is great for anyone that is looking to make a significant one-time improvement or addition to their home and needs their home equity loan in a lump sum amount.

Downsides of a Home Equity Loan

Though home equity loans certainly do provide you with some short-term freedom that you need to make your home improvement project or financial goal possible, there are undoubtedly some downsides to the transaction. For those with a high house payment that they can barely afford as it is, these loans are rarely an option. They will add another payment each month that has to be paid back. For someone with an income that can support this, this isn’t a problem. For someone that is struggling as it is, it is likely not a great idea.

Another downside to a home equity loan is that it could increase the amount of time that it takes to pay off your home. Since you will be taking equity out that you have already paid in, the amount of time before your home is paid off may increase. This could add months or years of payments on your home.

What Banks Provide Home Equity Loans?

Almost every bank out there provides home equity loans as part of their product suite. However, that doesn't mean that you should just go to any bank to get a home equity loan. You may want to consult with the bank that holds the primary home mortgage on your home to make the process smooth since you'll be dealing with the bank that you already work through for your home loan. However, you will probably want to compare multiple banks since each offer their own rates and terms.

Are Home Equity Loans Tax-Deductible?

One of the best benefits of a home equity loan is not only that they allow you to improve on your home, but that they also are tax-deductible. However, it is important that you know the details. Interest paid on home equity loans is tax-deductible if the funds from the loan are being used to improve the property that the individual owns already. If these funds are used for any other purpose, they are not tax-deductible and may not be claimed.