Home equity is generally the home’s value minus debt secured by it. A home equity loan or home equity line of credit lets you borrow against that equity. Because the home secures the debt, missed payments can have far more serious consequences than missed payments on unsecured credit.
Home equity loan
You receive a set amount, usually in one lump sum, and repay it over a defined term. The rate may be fixed or adjustable. This structure can fit a known, one-time expense when predictable payments matter.
HELOC
A HELOC is revolving credit with a maximum limit. During the draw period, you can borrow, repay, and borrow again under the agreement. HELOCs commonly have adjustable rates. Payments may change with the rate, balance, and transition from the draw period to the repayment period.
Compare these terms
- Fixed or variable rate, index, margin, and adjustment caps
- Draw period and repayment period
- Minimum draw and minimum balance
- Appraisal, annual, transaction, inactivity, or early-closure fees
- Whether the lender can freeze or reduce the available line
- Balloon payment or full-payoff requirement
Do not treat equity as income
If the underlying budget remains negative, the loan converts an ongoing cash-flow problem into debt secured by the home.
For a principal residence, federal law may provide a three-business-day right to cancel certain home-equity transactions after opening or receiving disclosures, whichever is later. Read the notice and follow the specified written procedure if you decide to cancel.