If you’re looking to fund a big purchase, pay off high-interest debt, or invest in your home’s value, you’re probably wondering: Should I tap into my home equity—or explore other financing options? With so many choices—home equity loans, HELOCs, personal loans, credit cards, or even a cash-out refinance—choosing the best path can be tricky.
This guide will help you understand how home equity compares with other financing tools, what the pros and cons are, and how to make the right choice based on your goals, timeline, and risk tolerance.
Home equity financing typically offers lower interest rates and larger borrowing limits, but it puts your home at risk and often takes longer to process. Other financing options—like personal loans or credit cards—are quicker and unsecured, but come with higher rates and stricter repayment terms. The right option depends on your financial goals, timeline, and comfort with risk.
What Is Home Equity Financing?
In simple terms, home equity financing allows you to borrow money using the value you’ve built up in your home. It comes in two main forms:
- Home Equity Loan (HEL): A lump-sum loan with a fixed interest rate, repaid over a set term.
- Home Equity Line of Credit (HELOC): A revolving credit line that you can draw from as needed, typically with a variable interest rate.
Your home equity is calculated as:
Home Value – Mortgage Balance = Home Equity
For example, if your home is worth $400,000 and your mortgage balance is $240,000, you have $160,000 in equity. Most lenders allow you to borrow up to 85% of that equity—minus what you still owe.
Why Home Equity Is a Popular Financing Choice
Homeowners in the U.S. held over $17 trillion in tappable equity as of 2023 (source: CoreLogic), and more people are exploring equity loans as interest rates climb and inflation squeezes budgets.
Key Benefits of Home Equity Loans and HELOCs
- Lower Interest Rates: Because they’re secured by your property, rates are often 2–5% lower than personal loans or credit cards.
- Higher Loan Amounts: You can typically borrow more through home equity than with unsecured credit.
- Potential Tax Deductions: Interest may be tax-deductible if used for substantial home improvements (check IRS guidelines or a tax advisor).
- Predictable Payments (HEL): Fixed-rate loans offer steady monthly payments, which are ideal for budgeting.
Potential Drawbacks
- Risk to Your Home: Defaulting on a home equity loan or HELOC could lead to foreclosure.
- Csing Costs & Appraisal Fees: These loans often come with fees similar to a primary mortgage
- Longer Approval Process: It can take 2–4 weeks or more to close, especially with appraisals and underwriting.
What Are the Alternatives to Home Equity Financing?
Sometimes, home equity isn’t the best—or even possible—option. Here’s how other financing options compare:
1. Personal Loans
Unsecured loans from banks, credit unions, or online lenders. Typically fixed-rate, with repayment terms of 2 to 7 years.
- Best For: Emergency expenses, small renovations, or debt consolidation
- No collateral required
- Higher interest rates (7%–20%+ depending on credit)
- Fast approval (1–5 days)
2. Credit Cards
Ideal for short-term or revolving expenses, especially when you can pay off the balance monthly.
- Best For: Small purchases, short-term needs, or 0% intro APR offers
- Immediate access to funds
- Very high rates (average APR: 20%+)
- Easy to accumulate revolving debt
3. Cash-Out Refinance
Refinancing your existing mortgage for more than you owe and taking the difference in cash.
- Best For: Major projects, especially when mortgage rates are favorable
- Consolidates your mortgage and cash need into one loan
- Higher closing costs and a new mortgage rate
- Longer closing timelines (30+ days)
Home Equity vs. Other Financing Options: Comparison Table
Feature |
Home Equity Loan |
HELOC |
Personal Loan |
Credit Card |
Cash-Out Refi |
| Collateral Required | Yes | Yes | No | No | Yes |
| Interest Rate Type | Fixed | Variable | Fixed | Variable | Fixed or Variable |
| Rate Range (Typical) | 6%–9% | 7%–10% | 8%–20%+ | 19%–29% | 6%–8% |
| Loan Amount Range | $25k–$500k | $10k–$500k | $1k–$50k | Varies | $50k–$1M+ |
| Approval Time | 2–4 Weeks | 2–4 Weeks | 1–5 Days | Same Day | 3–6 Weeks |
| Risk to Property | Yes | Yes | No | No | Yes |
| Best Use Case | Renovations, debt consolidation | Ongoing projects | Emergency needs | Everyday spending | Major remodel, long-term savings |
When Should You Choose Home Equity?
Ideal for You If:
- You have significant home equity (usually at least 20%)
- You’re planning a major home improvement project
- You want lower rates and predictable repayment
- You’re consolidating high-interest debts
🚫 Not Ideal If:
- You’re planning to move or sell your home soon
- You don’t want to risk your home as collateral
- You need funds quickly or only require a small amount
How to Apply for a Home Equity Loan or HELOC: Step-by-Step
Step 1: Evaluate Your Equity
Use your home’s current market value and your mortgage balance to calculate how much you can borrow.
Step 2: Check Your Credit
Most lenders require a credit score of 620+ for home equity products. Better scores get better rates.
Step 3: Compare Lenders
Get quotes from banks, credit unions, and online lenders. Review APR, fees, repayment terms, and customer reviews.
Step 4: Gather Documents
Typical documentation includes:
- Proof of income (W-2s, pay stubs, tax returns)
- Mortgage statement
- Property tax bill
- Homeowners insurance
Step 5: Get an Appraisal (if needed)
Lenders may require a home appraisal to verify your property value.
Step 6: Review and Close
Once approved, review the final terms carefully. Closing may take 2–4 weeks, depending on lender speed.
FAQs About Home Equity vs. Other Financing
Is it better to use a home equity loan or a personal loan?
A home equity loan typically offers lower rates and larger sums, but you risk your home. Personal loans are safer but costlier.
How much equity do I need to borrow?
Most lenders require that you retain at least 15%–20% equity in your home post-loan.
Can I use a HELOC for anything?
Yes, though tax deductibility applies only for home improvement expenses.
What’s the fastest financing option?
Personal loans and credit cards are the quickest, often funding in 1–2 days.
Is a cash-out refinance better than a home equity loan?
It depends. A refinance may offer better long-term savings if current rates are favorable, but closing costs and timing are higher.
Final Thoughts:
Your best financing option depends on three key factors:
- How much do you need?
- How fast do you need it?
- Are you comfortable leveraging your home?
Home equity loans and HELOCs are great tools for disciplined borrowers with a clear purpose—especially for home improvements or debt consolidation. If speed and flexibility matter more—or your equity is limited—personal loans or credit cards may serve you better.