How Long Are Home Equity Loan Terms? Explore Repayment Options
A home equity loan is a lump sum you can borrow and pay back over a five- to 30-year term. This timeline is similar to other loan options that use your home as collateral and require you to repay the debt — with interest — on a set schedule.
Turning home equity into spendable cash can be a good choice if you need to consolidate high-interest debt, expand a business or replace an aging roof. However, it’s important to first understand how repayment works and whether it fits into your financial plan.
How long are home equity loans likely to last?
Home equity loan terms usually start at five years, but can be stretched to between 10 and 30 years, depending on your lender. Typically, the longer your loan term, the more affordable your monthly payments will be. On the other hand, a shorter loan term usually comes with a higher monthly payment.
If a low payment is your primary goal, you can take out a loan with a longer term but pay it back early (just make sure your lender doesn’t charge a prepayment penalty). This strategy can save you thousands of dollars in interest fees, while still providing some wiggle room in your budget. You can put extra cash toward your outstanding loan balance whenever possible, but stick with the minimum payment in months where your budget is stretched thin.
A home equity loan is a type of second mortgage that allows you to borrow against your home equity, the difference between your home’s value and your outstanding mortgage balance. Similar to a traditional first mortgage, the loan uses the home as collateral and is repaid in fixed monthly installments. In the event of a foreclosure, a home equity loan is second in line to be repaid after a first mortgage.You’ll typically need a maximum 85% loan-to-value (LTV) ratio to meet home equity loan requirements. Your LTV ratio is the percentage of your home value that’s financed by a mortgage. However, if you need more money, some lenders offer high-LTV home equity loans.
Try using our home equity loan calculator below to see an estimate of how much money you could get from a home equity loan:
Which home equity loan terms should you consider?
The best home equity loan term for you usually depends on how much you can afford to pay monthly. Your lender considers your debt-to-income (DTI) ratio — the percentage of your gross monthly income used to repay debt — when qualifying you for a loan. In most cases, your DTI ratio shouldn’t exceed 43%.
| 10-year home equity loan | 15-year home equity loan | 20-year home equity loan | 30-year home equity loan | |
|---|---|---|---|---|
| Interest rate* | 7.20% | 7.18% | 7.86% | 7.375% |
| Monthly payment | $1,171.42 | $908.92 | $827.75 | $690.68 |
| Total interest paid | $40,570.25 | $63,605.88 | $98,659.56 | $148,643.05 |
*Rates are current as of September 2023
Longer terms leave more space in your budget
It often makes sense to choose a longer repayment term for a larger loan balance so you can maintain a comfortable cash flow. In the example above, a home equity loan with a 10-year term will cost you nearly $1,200 a month. If that stretches your budget too much, you might want to consider a 15- or 20-year term instead.
Home equity loan terms vs. HELOC terms
A home equity line of credit (HELOC) has terms comparable to home equity loans, typically lasting five to 30 years. However, a HELOC is an open credit line that you can use as needed. Just like with a credit card, you’ll make payments based on what you borrow, plus the interest charged on the balance you carry.
As long as you have access to the credit line, it can be used, repaid and used again. But once your HELOC draw period ends, you’ll have to repay your credit line according to your loan terms. This makes a HELOC a good choice if you’re not sure how much money you’ll need, or if you plan to make many purchases over time.
Should you consider a cash-out refinance instead?
Cash-out refinance repayment typically lasts 15 to 30 years. This is on par with longer-term HELOCs and home equity loans, but may not suit your needs if you need a five- or 10-year repayment period.
Like the other options we’ve discussed so far, a cash-out refinance is a mortgage that helps you tap your home equity. In this case, though, you’ll take out a new first mortgage for more than you owe on your current loan and receive the difference as a lump sum.
As with a home equity loan or HELOC, you can use the money from your cash-out refinance for virtually any purpose.
Frequently asked questions
It typically takes two to four weeks to apply for and receive the funds from a home equity loan. This is similar to how long it takes to get a HELOC, and slightly faster than the six to eight weeks it may take to get a cash-out refinance.
If your house is completely paid off, you have 100% equity.
There are a few disadvantages to a home equity loan, including:
- You’ll pay higher interest rates than for a HELOC
- You’ll pay closing costs
- You’ll need to have at least 15% equity built up in your home in order to qualify
Since HELOCs typically have lower interest rates and you’ll only pay interest on the funds you withdraw — rather than the full credit line amount — they’re often the cheapest way to access home equity. That said, you’ll need to run the numbers on your specific situation, using actual loan offers you’ve received, to truly understand what’s best for you.