As you pay down your mortgage and your home's value changes over time, you build something valuable: equity. Equity is the difference between what your home is worth and what you still owe on it. For many homeowners, it becomes one of the largest financial resources they have — and one they can borrow against when the need arises.
The two most common ways to tap that equity are a home equity loan and a home equity line of credit, often called a HELOC. Both use your home as collateral, which is why they typically offer lower rates than unsecured borrowing. But they work in quite different ways.
Home equity loans: one lump sum
A home equity loan gives you the full amount upfront. You then repay it over a fixed term, usually with a fixed interest rate and the same monthly payment each month. That predictability makes home equity loans a popular choice for one-time costs with a clear price tag, such as a roof replacement or consolidating higher-rate debt.
A HELOC works more like a credit card secured by your home. You're approved for a maximum amount and can draw from it as needed during a set draw period, paying interest only on what you use. Rates are often variable, so payments can change. HELOCs suit ongoing or uncertain expenses, like a renovation completed in phases.
How much can you borrow? Lenders look at your combined loan-to-value ratio — your current mortgage plus the new loan, divided by your home's value. Many cap this at a certain percentage, and they'll also review your credit, income and existing debts before approving you.
Because your home secures the loan, borrowing against it carries real risk. If you can't keep up with payments, you could lose your home. It's wise to borrow only for purposes that genuinely improve your finances or your property, and to be cautious about using equity for everyday spending.
Deciding what fits
Choose a home equity loan if you know the exact amount you need and value steady payments. Consider a HELOC if your costs will arrive over time and you're comfortable with a payment that may change. Either way, compare closing costs, fees and rates across lenders before you commit.
Want to see how much equity you may be able to use? Try the calculator on our home page, then book a free home equity review with a Finance Loan Point mortgage specialist.