Explore Home Equity Options
If you've built equity in your home, tapping into it is often the most affordable way to finance an addition. But HELOC and home equity loans work differently—and understanding the distinction can save you thousands in interest.
Quick Summary
Typical rates
7-10% APR
Max borrowing
80-85% of equity
Best for
$50K-$250K projects
Understanding Home Equity
Home equity is the difference between your home's current market value and what you owe on your mortgage. If your home is worth $500,000 and you owe $300,000, you have $200,000 in equity. Most lenders let you borrow up to 80-85% of this amount.
Quick Equity Calculation
Home value ($500K) - Mortgage balance ($300K) = Equity ($200K)
Borrowable amount: $200K x 80% = $160,000
HELOC vs. Home Equity Loan
HELOC
A Home Equity Line of Credit works like a credit card—you have a credit limit and borrow what you need, when you need it.
Home Equity Loan
A home equity loan gives you a lump sum upfront with fixed monthly payments over a set term—like a second mortgage.
For home additions: HELOCs are often preferred because construction costs are paid in stages. You draw funds as invoices come due, minimizing interest costs. However, if rates are rising, a fixed home equity loan provides payment stability.
How HELOCs Work
A HELOC has two phases that are crucial to understand before committing:
Draw Period (5-10 years)
During the draw period, you can borrow up to your credit limit whenever you need. Most HELOCs require interest-only minimum payments during this phase.
- • Borrow and repay multiple times
- • Interest-only payments keep monthly costs low
- • Variable rate adjusts with prime rate
- • Unused credit available for emergencies
Repayment Period (10-20 years)
After the draw period ends, you can no longer borrow. Your balance converts to a standard loan with principal + interest payments.
Warning: Payments can increase dramatically when the repayment period starts. A $150,000 balance with interest-only payments of $875/month could jump to $1,450/month once principal repayment begins.
Current Rate Environment
Home equity rates are influenced by the Federal Reserve's decisions. Here's what to expect in the current market:
| Product | Typical Rate Range | Rate Type |
|---|---|---|
| HELOC | 7.5%-10.5% APR | Variable |
| Home Equity Loan (10-year) | 7.75%-9.5% APR | Fixed |
| Home Equity Loan (15-year) | 8.0%-10.0% APR | Fixed |
Rates vary by credit score, loan-to-value ratio, and lender. Rates shown are estimates and may have changed.
Understanding the Risks
Home equity financing puts your house on the line. Make sure you understand and are comfortable with these risks:
Your Home Is Collateral
If you can't make payments, the lender can foreclose on your home—even if you're current on your primary mortgage. This is a secured debt with serious consequences for default.
Underwater Risk
If home values decline, you could owe more than your home is worth. This makes refinancing or selling difficult and could trap you in an unfavorable loan.
Variable Rate Exposure
HELOC rates can increase significantly over time. A rate that starts at 8% could rise to 12% or higher if the Fed raises rates, potentially doubling your interest costs.
What You'll Need to Apply
Prepare these items before applying to streamline the process:
Documents Required
- • Recent pay stubs (2-3 months)
- • W-2s or tax returns (2 years)
- • Current mortgage statement
- • Homeowner's insurance proof
- • Government-issued ID
- • Bank statements (2-3 months)
Typical Requirements
- • Credit score: 680+ (ideal: 720+)
- • Debt-to-income ratio: Under 43%
- • Combined LTV: 80-85% max
- • 2+ years homeownership (some lenders)
- • Stable employment history
- • Home appraisal (lender arranges)
Frequently Asked Questions
Can I get a HELOC if I just refinanced?
Many lenders require a "seasoning period" of 6-12 months after refinancing before approving a HELOC. However, some lenders will work with you sooner, especially if you have strong credit and significant equity.
Is home equity loan interest tax deductible?
Yes, if the funds are used to "buy, build, or substantially improve" your home. Home additions qualify. Keep documentation proving how funds were used. Consult a tax professional for your specific situation.
Should I shop around for rates?
Absolutely. Rates can vary by 1-2% between lenders, which translates to thousands of dollars over the loan term. Get quotes from at least 3 lenders—including your current mortgage company, a local credit union, and an online lender.
How long does it take to get a HELOC?
Typically 2-6 weeks from application to funding. The appraisal is usually the longest step. Start the process early—ideally 2 months before you need funds—to avoid delays in your construction timeline.
Ready for the Next Step?
Home equity isn't your only option. For larger projects or if you have less equity, a construction loan might make more sense. Learn about this alternative next.