Key Insights to Consider
- Home equity loans and HELOCs generally provide access to larger sums at interest rates well below those of credit cards or personal loans.
- Popular—and often wise—uses of home equity include funding home upgrades, consolidating debts, and handling unexpected expenses.
- Though permissible, dipping into home equity for non-essential splurges is usually ill-advised.
The financial landscape is riddled with hurdles: soaring interest rates, inflation pushing prices ever higher, and dwindling savings all threaten the fiscal wellbeing of many Americans. Borrowing costs have surged to their loftiest in two decades, creating a double whammy as obtaining credit has become notably tougher. Nearly half (48%) of applicants seeking loans or credit products between late 2023 and the end of 2024 faced outright denial.
Yet, if you hold the keys to a home, there’s silver lining amid this gloom. The swelling value of properties has likely boosted your home equity—the chunk of your home you truly own outright. With this equity, you have the option to tap into funds for fresh expenses or wrap up lingering debts.
For homeowners weighing their cash options, here are eight compelling reasons to leverage home equity loans or home equity lines of credit (HELOCs), paired with a rundown of the upsides and pitfalls of each.
$302,000
The average homeowner holding a mortgage in the U.S. possessed over $300,000 in equity as of Q1 2025, with roughly $195,000 available to borrow without dipping below lenders’ typical 20% equity cushion.
Making the Most of Home Equity: Eight Strategic Uses
While no hard-and-fast rules restrict how you put your home equity to work, certain approaches stand out for maximizing its potential value.
1. Home Renovations That Pay Off
Investing in your digs often means boosting its market price—home equity loans or HELOCs can be the financial fuel for these projects.
Additionally, if you itemize deductions on your tax return, the interest paid on such loans might be deductible, sweetening the deal.
Advantages
- Transforms your property’s inherent value into working capital for upgrades.
- Potential to deduct interest expenses when you itemize taxes, up to IRS limits.
- A HELOC’s flexible draw schedule syncs well with phased remodels where payments to contractors are staggered or costs aren’t fully known upfront.
Drawbacks
- Mortgage payments combined with home equity loan installments may pinch your monthly budget.
- Larger remodeling plans might require borrowing beyond your equity’s reach.
- Failure to meet repayments risks foreclosure—your home is on the line.
2. Financing Education
Whether it’s you, your kids, or a loved one pursuing further learning, tapping home equity can help foot the bill. This approach usually only makes sense if your home equity loan’s interest rate beats those of student loans, which is rare but possible with private financing.
Keep in mind, some education expenses might be covered via employer benefits or forgiven through public service loan relief programs. In such cases, risking your home may not be wise.
Advantages
- Often lower interest compared to private student or personal loans.
- HELOC enables timed withdrawals matching tuition payment schedules.
- Potentially allows borrowing more than typical student loan limits.
Drawbacks
- Repayments begin promptly, especially with home equity loans.
- Federal student loan rates usually trump home equity loan rates.
- If you default, your home is at risk—unlike unsecured student debt.
- Other financial aid options might be available, reducing the need to tap equity.
3. Wrangling Debt into One Payment
Skyrocketing credit card balances have many turning to home equity to consolidate their debts. “It’s a strategy that can reduce your interest payments and ease monthly cash flow over time,” notes Matt Hackett, Senior VP of Operations at Equity Now.
Advantages
- Lower interest rates can slash what you pay monthly.
- Paying off credit cards this way can lift your credit score.
Drawbacks
- Shifts unsecured credit card debt into secured debt, backed by your home, intensifying risk.
- Without changing spending habits or repayment plans, you’re swapping debts, not solving them.
4. Covering Unexpected Emergencies
Experts recommend setting aside three to six months of expenses for emergencies. Sadly, over half of Americans (56%) lack even a three-month cushion, and just 41% would use savings for a major surprise bill as of early 2025.
In a pinch, a home equity loan or HELOC can provide a safety net—but only if repayment plans are clear. While having this option offers peace of mind, building dedicated emergency savings remains paramount. The application process for equity products has sped up due to online lenders, yet it’s seldom instant.
Advantages
- Interest rates on home equity loans may be lower than those on small business loans.
- Accessing funds may be easier via home equity than traditional business financing, especially for startups.
Drawbacks
- If your business or financial situation falters, loan payments remain due—potentially risking foreclosure.
5. Seizing Investment Opportunities
Using home equity to invest in assets—be it stocks, rental properties, or other ventures—can accelerate wealth-building, especially for younger homeowners. Although mortgage rates have come down from two-year peaks, they still hover around 8%, so your investment needs to outperform that to truly profit.
Advantages
- Early investment can compound growth and expand your financial base.
- Leveraging your home’s value can free up cash for other ventures.
Drawbacks
- Returns may not surpass the loan’s interest cost.
- Debt persists regardless of investment performance.
- Most home equity loan interest isn’t tax-deductible unless used for certain property-related purchases.
6. Supplementing Retirement Income
Falling short on retirement funds? Tapping into your home equity might boost your cash flow, helping to cover living costs, unforeseen bills, or comfort upgrades in your golden years. This method hinges on your ability to repay—before or after starting Social Security benefits.
Note the pitfalls: if you’re still servicing your primary mortgage, leveraging equity adds to your financial load. Reduced income in retirement can also complicate qualifying for new loans.
Advantages
- Accessing your home’s value might outweigh selling off investments.
Drawbacks
- Loan repayment plans must span your retirement and beyond—debt doesn’t vanish with death; heirs face decisions.
- Lower retirement income may limit loan eligibility.
7. Discretionary Spending: Cars, Weddings, Vacations
It might be tempting to finance big-ticket non-essentials—like a new vehicle, lavish party, or dream trip—with home equity. While loans typically carry lower interest than credit cards, the cost drags on long after the event has passed. Cars depreciate, weddings and holidays end in weeks, yet the payments linger for years, often decades.
Advantages
- Lower interest rates compared to credit cards can save overall costs.
- Get what you want sooner rather than later.
Drawbacks
- Long-term payments can outweigh the benefit of the immediate purchase.
- Risking your home for an expense without tangible returns is financially unwise.
What Exactly Is Home Equity?
Simply put, home equity equals the difference between your property’s current market value and the balance still owed on your mortgage. Paying down the mortgage or increases in home value both boost your equity share.
New homeowners may tap into equity quickly, but some lenders impose waiting periods before you can apply for loans or lines of credit. Qualification demands creditworthiness, proof of income, and typically a minimum 20% equity stake, though some lenders accept 15%.
Costs Associated With Home Equity Financing
Drawing from home equity isn’t cost-free. A home equity loan functions like a second mortgage: you get a lump sum upfront and repay over time with usually fixed interest.
HELOCs differ by allowing revolving credit withdrawals, akin to a credit card but secured by the home.
Calculating How Much You Can Borrow
Most lenders let you borrow up to 80-85% of your combined loan-to-value ratio (CLTV). This figure factors in your current mortgage plus any additional borrowing.
For instance, if your home values at $450,000, you owe $200,000 on your mortgage, and want a $50,000 home equity loan:
| ($200,000 + $50,000) ÷ $450,000 × 100 | 56% CLTV |
Frequently Asked Questions
How Much Can I Borrow Against My Home Equity?
That depends on your home’s value, outstanding mortgage balance, credit profile, and lender criteria. Generally, qualified applicants can access up to 80% of their home equity.
Will Using Home Equity Impact My Credit Score?
Initially, taking out a home equity loan or HELOC may ding your credit score due to higher debt levels and increased credit utilization. On the flip side, consistent on-time payments can boost your creditworthiness in the long run.
Is the Interest on Home Equity Loans Tax Deductible?
Possibly. If the funds finance “buying, building, or substantially improving” the secured home, the IRS allows, when itemizing deductions, interest to be deducted within limits similar to mortgage interest deductions.