How Do You Calculate How Much You Can Borrow With a Home Equity Loan?
Lenders typically allow you to borrow up to 80–85% of your home's appraised value, minus what you owe on your primary mortgage. For example, if your home is worth $400,000 and you owe $250,000, your available equity is $150,000. At 85% combined loan-to-value, you could borrow up to $90,000 in a home equity loan ($400,000 × 0.85 = $340,000 − $250,000). Credit score and income also affect approval and terms.
What Are the Best Uses for a Home Equity Loan?
Home equity loans work well for large, defined expenses: home renovations that increase property value, paying for college, or consolidating high-interest debt into a lower-rate loan. Using a home equity loan for home improvements may qualify for tax-deductible interest under IRS rules. Using it for discretionary spending — vacations, luxury goods — is risky because you are putting your home on the line for non-essential expenses.
How Is a Home Equity Loan Different from a HELOC?
A home equity loan provides a lump sum at a fixed rate, with consistent monthly payments over a defined term. A HELOC (home equity line of credit) works like a credit card — you draw funds as needed during a draw period, paying variable interest only on what you use. The home equity loan is better for known, one-time expenses; the HELOC suits ongoing or variable funding needs.
Frequently asked questions
Is the interest on a home equity loan tax deductible?
Interest on a home equity loan may be tax deductible if the funds are used to buy, build, or substantially improve the home securing the loan. Interest used for debt consolidation, medical expenses, or other purposes is generally not deductible under current tax law. Consult a tax professional to confirm eligibility based on your specific situation.
Can I lose my home if I default on a home equity loan?
Yes. A home equity loan is secured by your property. If you default, the lender can foreclose. This is a critical distinction from unsecured debt like credit cards — using home equity to pay off credit cards transfers an unsecured risk to a secured risk backed by your most valuable asset.