You own your home, and you’ve been paying down the mortgage faithfully. You’d like to access some of the money you’ve invested in your home, but aren’t sure how. These commonly asked questions and answers will help you understand how home equity loans and lines of credit work so you can make an informed decision.

What is a Home Equity Loan/Line of Credit?

Both are ways to borrow against the equity you’ve built in your home. For example, if you have a mortgage for $200,000, and you’ve paid down the mortgage to a balance of $100,000, you have built $100,000 worth of equity in the home. Assuming you have good credit, you can borrow against a portion (or in some cases, all) of the equity ($100,000, in this case) you have built up in the home. Both home equity loans and home equity lines of credit are secured by your home (as collateral).

What is the Difference Between a Home Equity Loan and a Home Equity Line of Credit?

A home equity loan is delivered as a lump sum. You make monthly payments on it like you would on any other loan.

A home equity line of credit is more flexible. You take out as much as you need as time passes. You still make monthly payments on the line of credit (if you’ve got a balance at the time), but you don’t have to take out the entire lump sum of money at any point. Many people like to open a line of credit for emergencies, but don’t actually use it. This way they have access to the equity in their home if they ever need it.

How Much Can You Take Out as a Home Equity Line of Credit?

This will depend on your lender, your credit score, and the amount of equity in your home in relation to a current appraisal of your home’s value. For an estimate, check out this home equity line of credit calculator, keeping in mind each individual lender will have different standards and offer different opportunities.

Are There Limitations as to How You Can Use Money Withdrawn From Your Home Equity Line of Credit?

You can use the money you withdraw any way you please. Many people use a home equity line of credit as a checking account cushion to avoid overdrafts (you can have it set up such that your checking account taps into the line of credit automatically) or to pay for expenses such as: moving, college, home improvements, travel, or when you need cash for something like starting a business.

Are There Any Tax Consequences or Benefits You Should Know About?

You can deduct the interest you pay on your home equity line of credit from your taxable income. This is a distinct advantage over many other forms of borrowing since you are essentially borrowing from yourself (since you built that equity by paying down your mortgage) and are able to deduct the interest paid, lowering your taxable income.

What Risks Are Associated With Home Equity Loans/Lines of Credit?

Since the loan is secured by your home, you could lose your home if you are unable to make payments. When taking out a home equity line of credit or loan, you must be prepared to repay the money you borrow, plus interest, even if that plan is simply to pay the loan/line of credit off when you sell the house and downsize for retirement. Consider this risk carefully, especially if you are in a precarious financial situation.

What Are Common Variations of Home Equity Loans/Lines of Credit?

Most lenders offer fixed rate, variable rate, and interest-only loans. If you sign up for a variable rate loan, make sure you pay attention to the cap rate (the highest interest rate possible). If you sign up for an interest-only loan, make sure you are prepared to pay off the loan in its entirety at the end of the lending period.

Does it Cost Anything to Open a Home Equity Loan/Line of Credit?

Charges vary by lender. If you already have your mortgage through the lender, you may not have to pay for some of the fees a new lender might have to charge, but staying with your original lender might not necessarily be to your advantage. For example, some lenders won’t charge for an appraisal, while others will. Because of this, it is to your advantage to comparison shop between lenders and you can start  by filling out this form.