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Home equity loan rates

Interest rates on home equity loans are often higher than rates on traditional mortgages. Typically, the more you borrow, the higher your rate will be, and your credit score also has an impact on the home equity loan rate you’re offered. The table below gives you a glimpse of average rates and the range of rates available.

Loan type Average Rate Range
15-year fixed 5.21% 2.25% – 11.75%
10-year fixed 5.02% 2.38% – 9.75%
5-year fixed 4.26% 1.89% – 8.00%

What is a home equity loan?

A home equity loan is a type of mortgage that allows you to borrow money against your home’s equity. It’s considered a second mortgage, since it’s attached to a home already secured by a first mortgage. The term “second mortgage” refers to the fact that the second mortgage lender is repaid after the first mortgage lender in a foreclosure.

What is home equity?

Home equity is the difference between your home’s market value and the amount you owe on your mortgage balance. For example, if your home is worth $350,000 and your first mortgage balance is $250,000, you have $100,000 worth of home equity.

How does a home equity loan work?

Home equity loans are usually fixed-rate loans. The lender gives you the money in a lump sum and you pay off the balance in even monthly installments with terms that typically range between five and 30 years.

You typically can’t tap all of your home’s equity, because home equity lenders set loan-to-value (LTV) ratio limits on how much you can borrow. Your LTV measures how much of your home’s value you’re borrowing, and the maximum LTV ratio for a home equity loan is often 85%.

How much can I borrow on a home equity loan?

Although most home equity lenders let you tap up to 80% of your home’s value, some lenders may offer high-LTV home equity loans that allow you to borrow more.

Here’s how you’d calculate the maximum home equity loan on a $350,000 home with a $250,000 loan balance and an 80% LTV ratio.

Steps to calculate maximum home equity loan amountHow the math looks
1. Multiply your home’s value by 0.80 (80%)$350,000 x 0.80= $280,000
2. Subtract your loan balance from the result $280,000 – $250,000
3. The result is your maximum home equity loan amount$30,000

You can also use a home equity loan calculator to get a quick snapshot of how much home equity borrowing power you have.

When should you get a home equity loan?

A home equity loan makes sense if:

  • You’re happy with your current first mortgage rate and want to leave the balance alone
  • You want a fixed-rate loan with a stable monthly payment
  • You have specific renovations you want to do and a set timeline for completing them
  • You’re paying off high-interest-rate revolving debt
  • You’re covering higher education costs
  • You’re buying a rental property
  • You’re expanding or starting a business
  • You’re avoiding mortgage insurance with a piggyback loan

Home equity loan requirements

Guidelines for home equity loans will vary from lender to lender, but you’ll typically need to meet the following general requirements to qualify:

43% maximum DTI ratio. Lenders divide your total debt by your pre-tax income to calculate your debt-to-income (DTI) ratio, and the standard home equity guideline maximum DTI ratio is 43%.

620 minimum credit score. Although lenders may set the bottom score limit at 620, they may set more strict guidelines on your DTI or LTV ratio.

80% maximum LTV ratio. According to the FDIC, many home equity lenders set the maximum LTV ratio at 80%. However, some specialty home equity loan lenders will set higher LTV ratio limits.

Owner occupancy. Some home equity lenders allow you to borrow on a second home or investment property but at much lower LTV limits than a primary residence. You’ll get the best rates and highest LTV ratios if the home equity loan is secured by a home you’re living in.

Closing costs. You’ll typically spend between 2% and 5% of your home equity loan amount on closing costs. Some banks and credit unions may offer special discounts if you open a checking or savings account and have your payment debited directly from your account.

Pros and cons of home equity loans

  • Your payment will be fixed and stable every month.
  • You may be able to deduct the mortgage interest on your taxes
  • You can use the money for any purpose
  • Your closing costs are typically less than cash-out refinance costs
  • You’ll reduce the available equity in your home.
  • You’ll have two monthly house payments
  • You’ll need higher scores and lower debt to qualify for the best rates
  • You could lose your home if you default on your payments.

Home equity loans vs. HELOCs

Homebuyers sometimes confuse home equity loans with home equity lines of credit, or HELOCs for short. A HELOC works more like a credit card, giving you the flexibility to pay off the balance and charge it again during a set time called a draw period that usually lasts 10 years. After the draw period ends, the remaining balance is paid in fixed installments. Here are some other important features of a HELOC:
  • The interest rate is usually variable. This could make the payment unaffordable if interest rates are on the rise.
  • The payment may be interest-only at first. During the draw period, many HELOC programs allow you to just pay the interest accruing each month.
  • The payments are only based on what you use during the draw period. Because a HELOC is a credit line, you only make payments on the balance you charge, plus interest.
 

Alternatives to home equity loans

  • Cash-out refinance

    With this type of refinance, you’ll replace your current first mortgage with a new larger first mortgage and pocket the difference in cash. Most cash-out refinance programs cap your LTV ratio at 80%, but the lending requirements are more lenient than home equity loans

  • Reverse mortgage

    Homeowners 62 years of age or older may be able to convert their home equity to cash, monthly income or a line of credit through a reverse mortgage, without having to make a payment on the amount borrowed.

  • Personal loan

    If you prefer to leave your home’s equity alone, you may qualify for a  personal loan. The rates are often higher than home equity products, but you won’t have to worry about the lender foreclosing on your home if you default.

  • Fixer-upper loans

    If you’re borrowing equity for home renovations, an FHA 203(k) or Fannie Mae HomeStyle® Renovation loan may be a better choice than a home equity loan or cash-out refinance. The big advantage: Lenders use the estimated value of your home after improvements to calculate your maximum loan amount, instead of basing it on the home’s current condition.

Home equity loan FAQS

Home equity is the difference between your home’s market value and what you currently owe on your mortgage. As you pay your loan balance down and home values increase over time, home equity usually grows.

To calculate how much home equity you have, subtract your outstanding loan balance from your home’s value. For example, if your home is worth $200,000 and your mortgage balance is $150,000, you have $50,000 of equity.

Most home equity lenders let you tap up to 85% of your home’s value, minus your outstanding first mortgage balance. Some lenders may offer high-LTV home equity loans that allow you to borrow more.

Home equity loan interest rates change with the financial markets, but are typically lower than other forms of borrowing, such as unsecured personal loans or credit cards.

It may take two to four weeks to close on a HEL. You may receive the funds at closing or a few weeks later, depending on the lender.

Making late payments on a HEL could damage your credit score. If you default on a HEL, you could lose your home because your home is the collateral that secures the loan.

Yes, if home equity loan funds are used for home improvement, the interest you pay on the loan can be deducted from your taxable income each year.