Your home equity is wealth you can borrow against at a far lower rate than a credit card charges, because the house secures the loan. That’s also the danger, since falling behind can cost you the home. Tap it only for costs that outlast the loan, and keep at least 20% of the home’s value unborrowed.
Three moves turn cheap home equity debt into a threat to the house, and none of them feels reckless when you make it.
The first is moving card debt onto the house without changing the spending behind it. When Consumer Financial Protection Bureau researchers tracked cash-out refinance borrowers from 2014 to 2021, their average card balances fell by more than $4,500 after the refinance and started climbing again within a year.
The second is budgeting around the early payments on a home equity line of credit (HELOC). A HELOC can require only interest while you draw on it, and it usually carries a variable rate. Once the draw period ends, which can be 10 years in, principal joins the bill, and the payment jumps even if the rate never moves.
The third is borrowing to the lender’s limit. Lenders typically let your mortgage and equity debt reach 80% to 85% of the home’s value, and some go higher. Borrow to 85%, and a 15% drop in the home’s price wipes out your equity, which makes selling or refinancing hard.
Set your own limits before you apply:
- Borrow only for costs that outlast the loan, such as a new roof or a renovation. Using the money to build or substantially improve the home is also the only use that can make the interest deductible.
- Keep your mortgage and equity debt together at or below 80% of the home’s value, even if the lender offers more.
- Budget a HELOC at the bigger payment due after the draw period, and at a rate a few points above today’s.
- If the money pays off credit cards, stop using those cards once the balances hit zero.
Treat any draw on your equity as the mortgage it is. If you wouldn’t take out a mortgage to pay for something, don’t borrow against the house for it.
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