A home equity loan (HEL) allows you to borrow against a portion of your home’s equity. Your lender provides the equity — the difference between what you owe on your mortgage and your home’s market value — in a lump sum.
A home equity line of credit (HELOC), on the other hand, is a revolving line of credit you can draw on when needed, during the preset draw period.
Home equity interest rates
Interest rates on HELs and HELOCs are typically higher than traditional mortgage rates because they are types of second mortgages, which take second position behind your original home loan. If you lose your home to foreclosure after defaulting on your loans, your original (first) mortgage lender would be repaid before your home equity lender.
If local home values drop, you might not have enough equity to pay off both your first and second mortgage if you have to sell your home. Or, if you fall on hard times, you might have to prioritize making payments on your first mortgage, leaving you behind on your second. Lenders consider these extra risks when offering home equity loan rates.
The rates and ranges in the table assume a $25,000 home equity loan or HELOC on a property with an 80% LTV ratio.