Home equity loans and HELOCs: what they really cost

Let’s talk about one of the more peculiar rituals of American homeownership: spending years paying down a house, then borrowing the paid-down part right back.

Nobody finds this odd, because the bank calls it “unlocking your equity,” and unlocking sounds like something you’d want to do. Sometimes it is. A kitchen that adds value to the house, a roof that stops leaking, a pile of 24% card debt replaced with something at a third of the rate: those can all be good trades. Other times it’s a very slow, very expensive way to buy a boat.

The short version: a home equity loan gives you a lump sum at a fixed rate, repaid in equal monthly payments. A HELOC (home equity line of credit) gives you a credit line you draw on as needed, usually at a variable rate. Both use your house as collateral, which is why they usually carry lower rates than a personal loan and why the lender can foreclose if you stop paying. This guide runs the numbers on both, plus a cash-out refinance and a personal loan, so you can see which one costs the least for what you actually need.

The equity is real money. So is the lien that comes with borrowing it.

What a home equity loan and a HELOC actually are

A home equity loan and a HELOC both let you borrow against the difference between what your home is worth and what you still owe on it; the loan pays out once at a fixed rate, and the line lets you borrow repeatedly at a rate that usually moves.

That difference is your equity. If your house would sell for $450,000 and you owe $250,000 on the mortgage, you have $200,000 of equity. You can’t borrow all of it (more on that below), but you can borrow a good chunk, and the lender records a second lien on the property to secure it. That’s why people often call both of them second mortgages.

Home equity loan: one lump sum, one fixed payment

You borrow a set amount, get it all at closing, and repay it in equal monthly payments over a fixed term, often 5 to 30 years. The FTC notes these loans typically carry a fixed APR. It’s the boring option, and I mean that as a compliment: you know the payment on day one and on the last day.

HELOC: a credit line with two phases

A HELOC works more like a credit card secured by your house. During the draw period, often around 10 years, you borrow what you need, when you need it, and many plans let you pay only the interest. Then the repayment period starts: you can’t borrow any more, and you start paying back principal, often over 10 to 20 years. The CFPB warns that monthly payments are often significantly higher once repayment begins, and some plans require the whole balance at once.

Most HELOCs are variable, usually priced as the prime rate plus a margin. The prime rate stood at 7.00% when this page was last updated, after the Federal Reserve raised its target range for the federal funds rate by a quarter point in September. When prime moves, your HELOC rate moves with it, and so does your payment, even if you haven’t borrowed another dollar.

HELOC vs home equity loan vs cash-out refinance, side by side

For most homeowners the choice comes down to four options, and the right one depends on how much you need, whether you need it all at once, and what rate your current mortgage carries.

General features only. Terms, fees and rates vary by lender and depend on your credit profile, your home’s value and your state.

Look at the “what’s at risk” column. Three of the four options put the house on the line. The fourth costs more precisely because it doesn’t. Most of this page is about that trade.

How much can you borrow against your house?

Many lenders let your total mortgage debt reach about 80% to 85% of your home’s value, so on a $450,000 home with $250,000 owed, the most you could typically borrow is around $110,000 to $132,500.

The number lenders use is the combined loan-to-value ratio, or CLTV: everything you’d owe against the house, divided by what the house is worth. For a HELOC, the full credit limit counts, not just what you’ve drawn. Here’s the arithmetic:

• Home value: $450,000
• Maximum at 85% CLTV: $450,000 × 0.85 = $382,500
• Minus what you owe on the mortgage: $382,500 − $250,000 = $132,500
• At a stricter 80% CLTV: $360,000 − $250,000 = $110,000

Limits vary by lender, so treat these figures as a starting point. The appraisal decides the home value, not the online estimate you check on Sunday mornings.

And being allowed to borrow $132,500 is not the same as needing $132,500. The lender’s limit is a ceiling, not a suggestion.

Home equity loan requirements

To qualify for a home equity loan or HELOC, lenders generally look for meaningful equity left over after the loan, a solid credit history, a manageable debt-to-income ratio, steady income and a property valuation.

• Equity. Enough that your CLTV stays within the lender’s limit after the new loan, usually 80% to 85%.
• Credit. Home equity lenders usually want good credit. A lower score may still qualify with some lenders, but the rate and the amount will usually be worse.
• Debt-to-income ratio. Your monthly debt payments, including the new one, compared with your gross monthly income. Lower is better.
• Income you can document. Pay stubs, W-2s or tax returns, and bank statements.
• A valuation. Does a home equity loan require an appraisal? Usually some kind of valuation, yes. Depending on the lender and the amount, that might be a full in-person appraisal or an automated or desktop valuation. Ask, because the appraisal fee is often yours to pay.

If your credit needs work before you apply, our guide to improving your credit covers the moves that matter most.

What sets your rate

Home equity rates start from a benchmark (the prime rate for most HELOCs, market rates for fixed loans) and your credit, CLTV and loan size decide how far above it you land.

• The benchmark. Most HELOCs float at prime plus a margin. Fixed home equity loans are priced off longer-term market rates. For reference, Freddie Mac’s average 30-year fixed mortgage rate was 7.03% in late September, its first reading above 7% since early last year, and second liens usually price above first mortgages.
• Your credit score. The margin over the benchmark shrinks as your score rises.
• Your CLTV. Borrowing up to 60% of the home’s value prices better than borrowing up to 85%. The lender’s cushion is bigger.
• Loan size and term. Very small or very long loans can price higher.
• Intro rates. Some HELOCs advertise a low starting rate that jumps after a few months. Ask what the rate becomes, and when.

Compare APRs and total costs, not just rates. The FTC points out that a HELOC’s APR is based on interest alone and doesn’t include points and other financing charges, so two lines with the same APR can cost different amounts to open.

A worked example: $50,000 for a kitchen, borrowed five ways

To borrow $50,000 against a house with a 3.25% mortgage, a 5-year home equity loan at 8.5% costs about $11,550 in interest, while a cash-out refinance at 7% adds about $220,600 in total interest over 25 years, because it reprices the whole mortgage.

Picture a household with a $450,000 house, $250,000 left on a mortgage at 3.25% with 25 years to go, and a kitchen that was last updated when phones had cords. Their current payment is $1,218 a month. They want $50,000. Here are their five routes, with illustrative rates.

Route one: the cash-out refinance. They refinance into a new $300,000 mortgage at 7%, which is close to Freddie Mac’s latest 30-year average, and keep the same 25-year payoff date. The payment jumps from $1,218 to $2,120 a month. Total interest over those 25 years goes from about $115,500 to about $336,100. They borrowed $50,000 and signed up for roughly $220,600 in extra interest, plus closing costs on the full $300,000. That’s because they didn’t just borrow $50,000 at 7%. They also moved $250,000 from 3.25% to 7%.

Route two: a HELOC, paying interest only. At 8% (prime plus one point, say), interest-only payments on $50,000 are a very relaxing $333 a month. After a 10-year draw period they’ve paid $40,000 in interest and still owe all $50,000. Then a 20-year repayment period begins at $418 a month, if the rate hasn’t moved. Total interest: about $90,400.

Route three: a home equity loan over 15 years. At 8.5% fixed, the payment is $492 a month and the total interest is about $38,600.

Route four: a personal loan over 5 years. At 12%, the payment is a chunky $1,112 a month, total interest about $16,700, and the house isn’t pledged at all.

Route five: a home equity loan over 5 years. Same 8.5% rate as route three, compressed to five years. The payment is $1,026 a month and the total interest is about $11,550.

The funny part is how badly the monthly payment predicts the total bill. The interest-only HELOC has the smallest payment on the list and the second-biggest cost. The five-year home equity loan stings every month and costs less than any other route.

Here the term matters more than the rate. The 5-year home equity loan and the 15-year one have the same 8.5% rate, and the longer one costs about $27,000 more. The personal loan charges 3.5 points more than the 15-year home equity loan and still comes out about $21,900 cheaper, because it’s over in five years. Meanwhile the cash-out refinance, with the lowest rate of the bunch, is the most expensive by a very wide margin, because it gives up a 3.25% mortgage to get there.

I like a nice kitchen. I don’t like it $209,000 more than the cheapest way to pay for it.

Illustrative example. The 7%, 8%, 8.5% and 12% rates are examples, not quotes or offers. The 7% refinance rate is close to Freddie Mac’s 30-year average of 7.03% for the week of September 24, 2026. Figures assume fixed payments, no fees, no prepayment and, for the HELOC, a rate that stays at 8%. Your actual rate and terms depend on your credit profile, your home and the lender. Run your own numbers with our loan calculator or mortgage calculator.

The HELOC interest-only trap

An interest-only HELOC can leave you owing the full balance after 10 years of payments, and when repayment starts, your payment can rise sharply even if rates don’t move.

In the example, the household paid $333 a month for ten years, $40,000 in total, and owed exactly what they borrowed. Then the payment went to $418. If prime had risen two points by then, putting their rate at 10%, the repayment amount would be about $483 a month instead, and their interest-only payment would have already crept up to about $417 before repayment even started.

None of this is hidden; the lender has to disclose the draw and repayment terms. It’s just easy to skim past when the first payment is so pleasant. If you take a HELOC, the frugal move is to pay it like a loan: pick a payoff date, divide, and pay that amount every month whether the lender asks for it or not.

Cash-out refinance vs home equity loan: which one wins

A home equity loan usually beats a cash-out refinance when your current mortgage rate is well below today’s rates, while a cash-out refinance can make sense when your current rate is already at or above what you’d get now.

The worked example shows why. If your first mortgage is at 3.25%, a cash-out refinance throws that rate away to borrow a fraction of the balance. If your first mortgage is at 7.5% and today’s rates are near 7%, the math flips: you might lower the rate on everything and get your cash in one loan, with one payment. Either way, compare the total interest on all your home debt, over the same payoff date, with and without the refinance. The payment alone won’t tell you.

HELOC vs personal loan: when not to use the house

A personal loan costs more per dollar than a HELOC but can cost less in total when you pay it off faster, and it keeps your home out of the deal, which matters most for smaller amounts and uncertain incomes.

For $10,000 or $15,000, the closing costs and appraisal on a home equity product can eat a good part of the rate advantage, and a personal loan can fund within days rather than weeks. For $50,000 and up, a home equity loan’s lower rate usually wins on dollars if you keep the term short. What the personal loan buys you, at any size, is that a job loss becomes a credit problem instead of a housing problem. Our guide to secured vs unsecured loans runs that trade in more detail.

Is home equity loan interest tax-deductible?

Interest on a home equity loan or HELOC is federally deductible only if you use the money to buy, build or substantially improve the home that secures the loan, and only if you itemize.

The One Big Beautiful Bill Act made the Tax Cuts and Jobs Act rules permanent. So a kitchen renovation can qualify, while paying off credit cards, buying a car or covering tuition with the money does not. Total qualifying mortgage debt is capped at $750,000 ($375,000 if married filing separately; higher for some older mortgages), and with today’s large standard deduction, many households don’t itemize at all. IRS Publication 936 has the details. Talk to a tax professional before you count on the deduction; it’s a bonus, not a reason to borrow.

Is borrowing against your home right for you?

Borrowing against your home is a reasonable choice when you can answer yes to every question below; if any answer is no, a smaller loan, an unsecured loan or waiting is probably the better call.

• Is the money going to something that lasts at least as long as the loan, like a repair or an improvement?
• Could you keep making the payment through three months of reduced income?
• Have you compared total interest, on the same term, against a personal loan and against a cash-out refinance?
• If you’re paying off cards, have you fixed what built the balance, so it doesn’t come back with the house now on the hook?
• Did you pick the shortest term you can comfortably afford, not the lowest payment on offer?

If you answered no to the last question, go back and look at the chart again. The lowest payment is rarely the cheapest loan.

Red flags: home equity offers that are traps

The most dangerous home equity offers are built around your house rather than your ability to repay, and they tend to arrive uninvited.

• Equity stripping. A lender that barely looks at your income because it’s counting on your equity. If you can’t make the payments, the house covers the loan.
• Loan flipping. Repeated offers to refinance, each with new fees and a longer term. Each flip takes more of your equity and leaves you further from payoff.
• Packing. Extra products such as credit insurance quietly added to the loan amount. Read the itemized costs and ask what each line is.
• Pressure and cold calls. Door-to-door contractors who offer to arrange financing, or lenders who push you to sign today. Say no, then shop around.
• Blank spaces and changed terms. Never sign with blanks. The FTC’s advice: if the financing isn’t what you expected at closing, don’t sign.
• Last-minute wire instructions. The FTC warns that an unexpected email asking you to wire closing costs to a new account is a scam. Call your lender at a number you already know.

Your rights: three days to cancel, and when a HELOC can be frozen

When your main home secures a home equity loan or HELOC, federal law generally gives you until midnight of the third business day to cancel for any reason, in writing, and get your fees back.

Per the FTC, business days here include Saturdays but not Sundays or legal holidays, so close on a Friday and you have until midnight Tuesday. The right doesn’t apply to a vacation or second home. You must cancel in writing, not by phone, and the lender then has 20 days to return what you paid and release its claim on the house.

After you open a HELOC, the lender generally can’t close it, demand faster repayment or change the terms as long as you pay as agreed and meet the plan’s other terms. But it can freeze or reduce the line if your home’s value drops significantly or if it reasonably believes a change in your finances means you can’t pay. So don’t treat an unused HELOC as a guaranteed emergency fund. The two situations that let a lender freeze it, falling home prices and a shaky income, are the same ones in which you’d most want to use it.

How a home equity loan affects your credit

Applying for a home equity loan or HELOC usually brings a hard inquiry, and after that, on-time payments help your credit while missed payments hurt it and can lead to foreclosure.

• Applying. A hard inquiry can lower your score slightly for a while.
• Using a HELOC. Depending on the scoring model, a heavily drawn line can weigh on your score the way a maxed-out card does.
• Paying off cards. Moving card balances to a home equity loan can lower your credit card utilization, which often helps your score, as long as the cards stay paid off.
• Missing payments. Late payments hurt, and a foreclosure is one of the heaviest marks a credit report can carry.

Alternatives worth a look

Before you pledge the house, price out the options that don’t.

• A personal loan. Higher rate, no lien, fast funding, and often cheaper in total if you keep the term short.
• Saving up for part of it. Every $10,000 you pay in cash is $10,000 you don’t pay interest on. It’s the least exciting financing option on this page, and it never charges interest.
• A smaller project. The kitchen that costs $30,000 instead of $50,000 still has a working stove.
• A debt management plan. If the goal is paying off cards, a nonprofit credit counseling agency can often negotiate lower rates without any new loan. Our debt consolidation guide compares the routes.
• A 0% balance transfer card. For smaller balances you can clear within the promo period. Watch the transfer fee and the rate when the promo ends.

Here’s your homework for this week. Find your current mortgage statement and write down two numbers: your rate and your balance. Then, for whatever you’re thinking of borrowing, price it three ways on the same term: a home equity loan, a personal loan, and a cash-out refinance on the whole balance. Add up total interest, not payments. It’s about half an hour with a calculator, and it might be the most profitable half-hour of your year.

Frequently asked questions

About Loans.net: Loans.net is a loan marketplace, not a lender. We don’t make credit decisions, set rates or fund loans; lenders do. We don’t currently match home equity loans or HELOCs; personal loan requests go to lenders in our network, and a lender that can make you an offer contacts you directly. We may receive compensation from lenders and partners in our network, and how we’re paid varies by partner. Not every lender or loan product is in our network. Rates, fees and terms are set by each lender and depend on your credit profile. Not available in all states. This page is general education, not financial, legal or tax advice.

Related guides

• Secured vs unsecured loans: what collateral saves you, and what it risks
• Personal loans: send one request to lenders in our network
• Debt consolidation: combining debts into one payment
• How a mortgage works: the first lien your equity sits behind
• Mortgage calculator: test a cash-out refinance payment
• Loan calculator: compare total interest on any two loans
• Improve your credit: move your rate before you apply
• Bad credit loans: what’s realistic with a lower score

Last updated: September 2026. Rate references were checked against the Federal Reserve’s September 16, 2026 FOMC statement and Freddie Mac’s survey for the week of September 24, 2026. Example rates in the worked example are illustrative.