Using Home Equity to Start or Grow a Business

You’ve worked hard to build equity in your home. Now you might be thinking about taking the next step: starting a business or growing one you already have. You may also have heard that using your home equity could be a way to fund it.

But how does that actually work? And more importantly, is it the right move for you?

Using home equity to support a business isn’t uncommon, but it’s also not a decision to make lightly. Your home is likely your biggest financial asset, and using it as collateral comes with real risks alongside the potential benefits.

This article will walk you through what you need to know, from understanding the difference between a home equity loan and a HELOC, to weighing the costs, risks, and alternatives, so you can make a confident, informed decision.

What Is Home Equity and How Can It Be Used?

Home equity is the portion of your home that you truly own, calculated as the difference between what your home is currently worth and what you still owe on your mortgage. For example, if your home is valued at $500,000 and you owe $350,000 on your mortgage, you have $150,000 in equity.

Home equity can grow over time by consistently paying down your mortgage or by an increase in the value of your home. The value of that equity can be accessed through different types of loans, which allow qualified borrowers to borrow against the value that’s been built up in their property.

Homeowners use home equity for a variety of purposes:

• Home renovations
• Consolidating high-interest debt
• Covering education expenses
• Managing unexpected costs

Some also explore using it to fund or expand a business. However, this, along with any home equity loan use case, requires careful consideration.

Though this can be a way to access the cash you’re looking for, home equity loans and lines of credit use your home as collateral. That means if you’re unable to make the payments, you could risk losing your home through foreclosure.

Home Equity Loan vs. HELOC: What’s the Difference?

If you’re considering using your home equity to fund a business, you’ll likely encounter two main options: a home equity loan (HELOAN) and a home equity line of credit (HELOC). While both allow qualified borrowers to access the equity they’ve built in your home, they work differently.

Home Equity Loan (HELOAN)

A home equity loan gives you a lump sum of money upfront. You would then repay it over a set period of time, usually with a fixed interest rate and fixed monthly payments. This structure may make budgeting easier since your payment amount stays the same throughout the life of the loan.

If you have a specific, one-time expense in mind (like purchasing equipment, renovating a commercial space, or covering startup costs), this option might make sense.

Home Equity Line of Credit (HELOC)

A HELOC works more like a credit card. You would be approved for a certain amount of credit, and you would be able to draw from it as needed during what’s called the draw period.

After the draw period ends, you enter the repayment period, during which you’ll pay back both the principal and interest. HELOCs often come with variable interest rates, which means your payments can fluctuate over time. This option can be appealing if your business expenses are ongoing or unpredictable.

Which One Fits Your Situation?

The right choice depends on your business needs, your comfort with payment variability, and how you prefer to manage debt. Both HELOCs and HELOANs come with the same fundamental risk: your home is collateral, and failure to repay could result in foreclosure.

Before moving forward with either option, it’s worth speaking with a lender to understand the terms, costs, and requirements specific to your situation. You may find one of these home equity options is suitable for your needs, or you may find that neither option is a good fit.

Why Homeowners Consider This Option for Business

For many business owners and aspiring entrepreneurs, accessing affordable capital can be one of the biggest hurdles. Traditional business loans sometimes come with higher interest rates, stricter qualification requirements, or lengthy approval processes. If you’ve been turned down for business financing, or if the terms you’ve been offered feel out of reach, you’re not alone.

That’s where home equity can enter the picture. Because these loans are secured by your home, lenders may offer lower interest rates compared to unsecured business credit or credit cards.

Home equity financing also tends to have fewer restrictions on how you use the funds. Unlike some business loans that limit what you can spend the money on, a home equity loan or HELOC gives you more control. Whether you’re covering startup costs, purchasing inventory, or investing in equipment, you decide how to allocate the funds based on your business needs.

That said, it’s important to remember that lower interest rates and fewer restrictions don’t eliminate the financial responsibility or risk. The reason these loans may offer better terms is precisely because your home is on the line. If your business doesn’t generate the income you expect, or if you encounter unexpected expenses, you’re still obligated to make those monthly payments. Falling behind could put your home at risk of foreclosure.

What to Consider Before Using Home Equity for Business

Here are some key factors to weigh before moving forward.

Your Home Is Collateral

This is the most important thing to understand, which is why we’ve emphasized it so much: when you borrow against your home equity, your home serves as collateral for the loan. If you’re unable to make payments, you could face foreclosure. Unlike business debt that’s separate from your personal assets, this loan ties your business success directly to your housing stability.

Upfront and Ongoing Costs

Home equity loans and HELOCs come with costs beyond the interest rate. You may need to pay for an appraisal, closing costs, application fees, and in some cases, annual fees. These expenses can add up, so it’s worth getting a clear breakdown of what you’ll owe at closing and throughout the life of the loan.

Additionally, if you choose a HELOC with a variable interest rate, your monthly payment could increase over time, making it harder to budget, especially if your business income fluctuates.

Impact on Your Overall Financial Picture

Taking on additional debt affects more than just your monthly budget. It can impact your credit score, your debt-to-income ratio, and your ability to qualify for other financing down the road. If you’re planning to apply for another loan in the future, this is worth considering.

Are There Other Options?

Before committing to using your home as collateral, it’s worth exploring alternatives. Small Business Administration (SBA) loans, business lines of credit, crowdfunding, partnerships, or even seeking investors are all possibilities depending on your business type and financial situation. None of these options put your home at risk, though they may come with their own trade-offs in terms of cost, time, or control.

Questions to Ask Yourself

Before deciding whether to use your home equity to fund your business, consider these questions:

• How much equity do I have, and how much do I actually need? Borrowing more than necessary increases your debt and your monthly payment.
• What are the total costs? Beyond the interest rate, factor in appraisal fees, closing costs, and any ongoing fees.
• Can I afford the monthly payments, even if my business revenue is unpredictable? Your loan obligations don’t pause during slow months.
• Am I comfortable putting my home at risk? If the business doesn’t go as planned, are you prepared for the possibility of foreclosure?
• Have I explored other financing options? SBA loans, business credit, or even bringing in a partner might offer funding without tying it to your home.

Taking the time to answer these questions honestly can help clarify whether this path aligns with your goals and your risk tolerance.

Final Thoughts

Using home equity to start or grow a business is a significant financial decision that comes with both potential advantages and serious risks. Before you move forward, make sure you understand the terms, the costs, the risks, and the long-term commitment you’re taking on.

If you’re uncertain, it may be worth speaking with a lender to get specific details about what a home equity loan or HELOC would look like in your situation. You might also consider consulting with a financial advisor or accountant who can help you evaluate whether this fits into your broader business and financial strategy.

Ultimately, the goal is to make a choice that supports your business ambitions while protecting your financial foundation.

Disclaimer: A HELOC is a revolving line of credit secured by your home. Borrowers can draw upon the credit as needed during the Draw Period and are only required to pay interest on the amount borrowed. Closed-end second mortgages, home equity loans (HELOANS), and cash-out refinance loans are not a revolving line of credit like HELOCs, and typically provide a single, lump-sum payment at closing that is repaid with a fixed rate in regular installments over a set term, similar to a traditional mortgage.