Margin Loan vs HELOC: Which Option Is Right for You

When you need to borrow a significant sum of money - whether for home improvements, debt consolidation, or investment opportunities - two powerful options emerge for those with substantial assets: margin loans secured by your investment portfolio and home equity lines of credit (HELOCs) secured by your home. Both offer relatively low interest rates compared to unsecured debt, but they come with fundamentally different risk profiles, terms, and psychological implications. Understanding these differences is crucial for making a decision that aligns with your financial situation and risk tolerance. At PsyFi, we believe that truly informed financial decisions require understanding both the mathematical reality and the behavioral dynamics involved.

Understanding the Two Borrowing Options

A margin loan allows you to borrow against the value of your investment portfolio, using your stocks, bonds, and other securities as collateral. Your brokerage firm extends credit based on the marginable value of your holdings, typically allowing you to borrow up to 50% of your portfolio's value for initial purchases under Federal Reserve Regulation T[1]. Margin interest rates vary significantly by brokerage, ranging from approximately 5% to 13% depending on the broker and loan amount, with discount brokers like Interactive Brokers and Robinhood offering rates at the lower end of this range[2][3].

A HELOC is a revolving line of credit secured by the equity in your home - the difference between your home's market value and what you owe on your mortgage. According to the Consumer Financial Protection Bureau, you can typically borrow up to 80-85% of your home's value minus your existing mortgage balance[4]. The national average HELOC interest rate is approximately 7.81% as of December 2025, according to Bankrate's survey of major lenders, though rates vary based on creditworthiness, loan-to-value ratio, and lender[5][6].

Interest Rate Comparison: The Numbers That Matter

Interest rates represent a crucial differentiator between these products. Margin loan rates are typically tied to brokerage base rates, which track the federal funds rate. At major brokerages, rates range from approximately 5.15% to 10.8% depending on the institution and account balance tier[7][8]. Fidelity's current base margin rate is 10.825% for smaller balances, while discount brokers offer significantly lower rates for active traders.

HELOC rates are variable and tied to the prime rate, which currently sits at 7.25% following Federal Reserve rate cuts in 2024 and 2025[9]. Most HELOC rates add a margin of 0.5% to 2% above prime, resulting in effective rates between 7.5% and 9.5% for qualified borrowers. CBS News reports that HELOC rates have fallen more than two percentage points since September 2024 when the Fed began its rate-cutting cycle[10][11]. Some lenders offer introductory rates as low as 5.99% for the first six to twelve months[12].

Both products have variable rates, meaning your costs will fluctuate with Federal Reserve policy decisions. However, HELOC rates typically move in lockstep with Fed actions, while margin rates may have more variation between brokerages.

The Critical Risk Difference: What Happens When Things Go Wrong

The most important distinction between margin loans and HELOCs lies in what happens when asset values decline - and this is where the psychological dimension becomes paramount.

Margin call risk makes margin loans inherently more volatile than HELOCs. If your portfolio value drops, your broker can issue a margin call demanding immediate additional funds or securities. FINRA regulations require brokers to maintain minimum equity requirements, and firms can sell your securities without contacting you if your account falls below maintenance levels[13][14]. During the March 2020 market crash, portfolios dropped 34% in just 23 trading days, triggering margin calls that forced investors to sell at the worst possible moment.

HELOC foreclosure risk operates on a much longer timeline. The FTC warns that defaulting on a HELOC could eventually result in foreclosure, but this process takes months or years, not days[15]. Additionally, HELOC lenders cannot force you to sell your home simply because property values decline - only if you actually miss payments. FINRA explicitly warns against using home equity to invest, noting that if investments perform poorly and you cannot repay the loan, you risk losing both your investment and your home[16].

Tax Implications: A Significant Difference

Tax treatment differs substantially between these borrowing options and should factor into your decision:

HELOC interest may be tax-deductible if funds are used to "buy, build, or substantially improve" the home securing the loan. The IRS limits this deduction to interest on combined mortgage debt up to $750,000 for loans originated after December 15, 2017[17][18]. Interest on HELOC funds used for other purposes - including investing - is not deductible for tax years 2018-2025.
Margin interest can be deducted as investment interest expense, but only against investment income - not ordinary income. You must itemize deductions and cannot deduct more margin interest than you earned in investment income that year.

For home improvement projects, HELOCs offer a clear tax advantage. For investment purposes, neither option provides straightforward tax benefits for most borrowers.

Best Uses for Each Loan Type

HELOCs are typically better for:

Home improvement projects (potentially tax-deductible interest)
Predictable expenses with known costs and timelines
Debt consolidation when you have a clear repayment plan
Emergency reserves where you want access to funds without necessarily drawing them

Margin loans may be appropriate for:

Short-term liquidity needs when you expect to repay quickly
Avoiding capital gains by borrowing rather than selling appreciated securities
Sophisticated investors who understand and can manage margin call risk
Tax-loss harvesting strategies requiring temporary liquidity

The Psychology of Collateralized Borrowing

Research on mental accounting by Nobel laureate Richard Thaler demonstrates that people treat money differently based on its source and categorization. Thaler's foundational work shows that borrowing against your home versus your portfolio creates different psychological frames that influence subsequent behavior[19][20].

When borrowing against home equity, many people feel heightened responsibility because their family's shelter is at stake. This psychological weight can actually serve as a beneficial constraint, encouraging more disciplined use of borrowed funds. Conversely, margin loans against investment portfolios can trigger the house money effect - the tendency to take greater risks with gains perceived as "winnings" rather than hard-earned savings. A 2025 meta-analysis in Frontiers in Psychology confirmed that people become more financially risk-taking after receiving unexpected income or gains[21].

Financial advisors warn against treating home equity like "a bottomless ATM." As one certified financial planner noted to Yahoo Finance, if something goes wrong with your investments, "you've now put your primary residence at risk"[22]. This framing should encourage careful consideration of whether the borrowing purpose justifies the specific collateral being pledged.

Making Your Decision: A Framework

For home repairs: HELOC is typically the better choice - lower rates for most borrowers, potential tax deductibility, and no margin call risk during market volatility
For investing: Exercise extreme caution with either option. FINRA explicitly warns about the risks of borrowing against your home to invest. If you must use leverage, margin may be preferable because you're not risking your shelter, but understand that margin calls can force liquidation at the worst times
For debt consolidation: HELOC generally offers better rates than margin loans for this purpose, but only if you address the spending habits that created the debt originally

How PsyFi Supports Better Borrowing Decisions

PsyFi's platform helps you evaluate borrowing decisions with behavioral awareness. Our decision framework tools guide you through the psychological factors that influence debt choices - from mental accounting biases to risk perception distortions. Stress testing scenarios help you understand how different market conditions would affect margin positions. Goal alignment features ensure that borrowing decisions support your broader financial objectives rather than satisfying short-term impulses.

The Bottom Line

Both margin loans and HELOCs offer access to relatively low-cost capital for those with substantial assets. HELOCs generally provide more stability and potential tax benefits for home-related expenses, while margin loans offer flexibility without risking your home - at the cost of potential forced liquidation during market downturns. The right choice depends on your specific purpose, risk tolerance, and ability to handle worst-case scenarios.

Before borrowing against either your home or portfolio, honestly assess whether the purpose justifies the risk and whether you can maintain payments even if your financial situation changes. Ready to make borrowing decisions with behavioral awareness? Discover PsyFi at psyfiapp.com.

Margin vs HELOC: Which Loan Should You Use for Investing or Home Repairs?