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Home Equity Loans: How to Shop for the One That's Best for You

A home equity line of credit can be a useful tool for major expenses at a relatively low rate, but your home is the collateral. Shopping carefully and understanding the real costs matters more here than with most other borrowing.

What is a home equity line of credit (HELOC)?

A HELOC is revolving credit secured by your home, similar in structure to a credit card but typically at a lower rate since your home backs the debt. Lenders generally set your credit limit by taking a percentage of your home's appraised value (commonly 75 to 80 percent) and subtracting your existing mortgage balance. For tax years 2018 through 2025, interest is only deductible when the loan proceeds are used to buy, build, or substantially improve the home securing the loan, a meaningful change from the rules that applied before 2018, so don't assume the interest will be deductible without checking your specific use of the funds.

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What to look for in the agreement

Most HELOCs carry a variable rate tied to a public index (the prime rate or a Treasury bill rate is common), plus a margin the lender adds on top, commonly around 2 percentage points. Ask what index and margin apply, how often the rate can change, and how high the index has moved historically. Every variable-rate HELOC secured by a home must include a cap on how high the rate can climb over the life of the plan; some also cap how much your payment can increase per adjustment. Watch for introductory "teaser" rates that reset after a short period, and ask whether you can convert some or all of the balance to a fixed rate later.

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Costs of setting up a HELOC

Expect costs similar to a home purchase: an appraisal fee, an application fee (often non-refundable if you're denied), points (one point equals 1 percent of your credit limit), other closing costs (attorney's fees, title search, mortgage filing, insurance), and possibly annual maintenance fees or per-draw transaction fees. Because your home secures the loan, the lender's risk, and often your rate, is lower than for unsecured credit, which can offset some of these upfront costs over time. Ask specifically whether any closing costs can be waived.

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How you will repay the plan

Some HELOCs require payments that cover a portion of principal plus interest; others allow interest-only payments during the draw period, meaning you owe the full amount borrowed when the plan ends. Regardless of the minimum, you're generally free to pay down more. Be clear on whether you'll face a balloon payment when the plan matures, and know how you would handle it (refinance, new loan, or another repayment source) before you borrow. If your rate is variable, your payment can rise meaningfully if the index moves; a $10,000 balance at 10 percent runs about $83 a month interest-only, but the same balance at 15 percent runs about $125.

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HELOC vs. a traditional second mortgage

A traditional second mortgage gives you a fixed lump sum repaid on a fixed schedule, useful when you know exactly how much you need for a specific purpose, like a home addition. A HELOC gives you ongoing access up to a limit, better suited to expenses that arise over time. Don't compare the two purely by APR: a traditional mortgage's APR includes points and other finance charges, while a HELOC's APR reflects only the periodic interest rate, so the two numbers aren't measuring the same thing.

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Comparing costs and loan terms

The Truth in Lending Act requires lenders to disclose the APR, fees, payment terms, and any variable-rate features before you're charged anything, and you generally have three business days after opening a HELOC on your primary home to cancel for any reason. When comparing loan offers generally, small differences in rate or term length can add up to real money: a 14 percent, four-year loan versus the same rate over three years can add several hundred dollars in total finance charges, so run the actual numbers rather than comparing monthly payments alone.

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Frequently asked questions

Is interest on a home equity loan still tax-deductible?

For tax years 2018 through 2025, it's deductible only when the loan proceeds are used to buy, build, or substantially improve the home that secures the loan. Using the funds for other purposes generally means the interest is not deductible.

What's the difference between a HELOC and a traditional second mortgage?

A second mortgage provides a fixed lump sum repaid on a set schedule. A HELOC is revolving credit you can draw against repeatedly up to your limit, similar in structure to a credit card but secured by your home.

Can I cancel a HELOC after signing?

For your primary residence, the Truth in Lending Act gives you three business days after the account is opened to cancel for any reason, with all fees refunded.

This guide is for general informational purposes only and is not tax, legal, financial, or investment advice. Every business situation is different, so consult a licensed professional before making decisions based on this content.