Your home isn’t just where you live; it’s likely your biggest financial asset. For many homeowners, the equity they’ve built can be a source of funding for their lives, from home renovations to debt consolidation. But accessing that equity through a home equity loan (HELoan) or home equity line of credit (HELOC) isn’t a decision to take lightly.
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David Kimball, CEO of Prosper Marketplace and a certified financial planner with over 25 years of experience in consumer credit, shared his expertise with GOBankingRates as part of our Top 100 Money Experts series. He’s seen countless homeowners make smart moves — and costly mistakes — when tapping into their home’s value.
“Home equity can be a powerful tool — but only if you borrow with purpose and a clear repayment plan,” Kimball said.
Before you consider either option, Kimball says there are three important questions every homeowner must ask themselves.
The first thing to figure out is how you plan to use the money. Do you need it all at once, or would you rather take it out bit by bit?
“The biggest difference comes down to how and when you access the funds,” Kimball explained. “A HELoan gives you a lump sum upfront, typically with a fixed interest rate and predictable monthly payments. You receive all the money at once and begin repayment immediately.”
HELoans work best when you know exactly how much money you need for one big expense — for example, renovating your kitchen and knowing it will cost $50,000, paying off credit cards, or covering a big medical bill.
“Conversely, a HELOC is a revolving line of credit from which you can borrow as needed over a set draft period, usually five to 10 years,” Kimball said. “A bank or lender will provide you with a maximum credit line amount, and as you repay what you owe, the amount becomes available again.”
HELOCs work like a credit card backed by your house. You borrow only what you need and pay interest on only that amount. This works better when you’re not sure exactly how much you’ll need or when you’ll need it, such as a home project that might cost more than expected or keeping money available for emergencies.
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This question gets to the heart of what Kimball considers the biggest mistake homeowners make: “borrowing without a clear, sustainable repayment plan.”
“It’s very easy to focus on the benefits of accessing cash, but remember: your home is the collateral,” he said.
The repayment structures differ between the two options. HELoans offer predictable fixed payments over a set term, making budgeting straightforward. You know exactly what you’ll pay each month and when the loan will be paid off.
HELOCs are more complex. “Especially with HELOCs, people can get caught off guard when draw periods end and repayment begins — often with large, variable payments,” Kimball said.
During the draw period (typically five to 10 years), you might pay interest on only what you’ve borrowed. But when that period ends, you enter the repayment phase, where you must pay both principal and interest on the full balance. This can create major payment shock if you’re not prepared.
What’s more, most HELOCs have variable interest rates. “If you’re considering a HELOC, prepare for the possibility of rising interest rates and how it can impact your monthly payments,” Kimball advised.
This final question is all about the psychological aspect of home equity borrowing that, unsurprisingly, often gets overlooked.
“Home equity can be a powerful financial tool, but it’s not ‘free money,’” Kimball said. “If used impulsively, these options can add unnecessary risks and financial strain.”
Kimball recommends being honest about your motivations. Are you tapping equity for:
Smart purposes: Home improvements that add value, consolidating high-interest debt, covering genuine emergencies or funding education.
Questionable purposes: Lifestyle upgrades you can’t otherwise afford, vacations or general spending without a clear plan.
“When used wisely, home equity products can help you build and protect your financial future,” Kimball said. “But it’s important to borrow with purpose.”
Kimball breaks down how different financial goals align with each product:
“For major, one-time home improvements with a defined budget, a HELoan’s fixed payments offer peace of mind. For phased projects, or if costs might fluctuate, a HELOC provides the necessary flexibility.”
“If you’re looking to pay off existing high-interest debt with a single, clear payment, a HELoan is often the more straightforward choice due to its lump sum nature and fixed repayment.”
“While ideally covered by an emergency fund, a HELOC can serve as a valuable financial safety net for unforeseen costs, offering access to funds only if and when they’re needed.”
Before borrowing against your home’s value, Kimball’s advice is straightforward: “Do the math upfront. Look at how much money comes in, what goes out, and what you already owe — then make a realistic plan for paying it back.”
Keep in mind that both options put your house on the line. You’ll usually get better interest rates than with other loans, but if you can’t make payments, you could lose your home.
“It’s not about how much you’re borrowing — but how you plan to borrow,” Kimball explains.
By honestly answering these three questions, you’ll ensure you’re ready to make this major decision.
This article is part of GOBankingRates’ Top 100 Money Experts series, where we spotlight expert answers to the biggest financial questions Americans are asking. Have a question of your own? Share it on our hub — and you’ll be entered for a chance to win $500.
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This article originally appeared on GOBankingRates.com: 3 Questions You Must Ask Before Tapping Into Your Home’s Equity
