Home equity loans let you borrow using 

the equity you’ve built up in your home 


collateral. You can often borrow more 

money at a lower interest rate than with 

other types of loans. And, in many cases, 

you can deduct the interest you pay on  

the loan when you file your tax return,  

reducing the actual cost of borrowing  

still further. Most of the other interest  

you pay, on car loans or personal loans,  

for example, isn’t deductible. 

You can choose between:

 Home equity loans, sometimes 

known as second mortgages

 Home equity lines of credit


With a home equity loan, you borrow a 

lump sum, usually at a variable rate of  

interest, although some fixed-rate loans 

are available. You pay off the debt in  

installments, just as you repay your  

mortgage, with some of each payment 

going toward the interest you owe and  

the rest toward the 


or loan 

amount. At the end of its term, or  

payment period, the loan is retired.

You may have to pay closing costs on 

your loan, just as you did for your first, or 

primary, mortgage. But lenders may offer 

loans with no up-front expenses as part  

of a promotional deal. You might also be 

offered a 

teaser rate, or a period of low 

interest, as an incentive to borrow. If that’s 

the case, the lender has to tell you the  

actual cost, or 

annual percentage rate 

(APR), and when the temporary rate ends.


Home equity lines of credit are actually 

revolving credit arrangements, which you 

can use in much the same way you use a 

credit card. Your 

credit line, or limit, is 

fixed, and you can write a check for any 

amount up to that limit. Whatever you 

borrow reduces what’s available until  

you repay. Then you can use it again.

The terms of repayment vary, and are 

spelled out in your agreement. In some 

cases you begin to repay principal and 

interest as soon as you borrow, or 


the line. In others, you pay interest only, 

with a 

balloon, or one-time full payment 

of principal due at some set date. Or, you  

may make interest-only payments for a 

specific period, and then begin to pay 

principal as well. 

Most credit lines have an access  

period, often five to ten years, during 

which you can borrow, and a longer  

payback period. The longer you take to 

repay, the more expensive it is to borrow. 


As a general rule, you can borrow up to 

80% of your equity in your home with a 

home equity loan. For example, if you 

owed $75,000 on a home appraised at 

$250,000, your equity would be $175,000. 

In most cases, you’d be able to borrow up 

to $140,000, or 80% of $175,000.

Some home equity lines of credit,  

especially those offered without closing 

costs or other up-front expenses, are 

capped at a fixed amount, often $50,000.

While you use the loan, your equity is 

reduced by the amount you owe. When  

it’s paid off, your equity is restored. How- 

ever, if your home loses some of its value  

during the loan period, you still owe  

the full amount you borrowed.


While home equity borrowing has many 

advantages, it has one serious drawback: 

If you 

default, or fall behind on repay-

ment, you could lose your home through 

foreclosure. That means the lender takes 

over the property and sells it at auction. 

That’s true even if you’ve made all the pay-

ments on your first, or primary, mortgage. 



They are easy to get


The rates are usually 

lower than on  

unsecured loans


The interest is tax 

deductible, though 

there may be a  

cap and other  

restrictions. Check 

with your tax adviser

Home Equity Borrowing

If you need to borrow, a home equity loan usually offers the 

best rates, plus the advantage of tax savings.