What Is a Home Equity Loan? Your Guide to When It’s a Good Option
A home equity loan is a second mortgage you can use to borrow a large amount money from your home’s value. Your home equity is collateral in a home equity loan, so you can get lower rates than other loans and use the cash to pay for home improvements, consolidate debt, or other expensive needs. Home equity loans help boost your borrowing power and are a great benefit of homeownership — but there are also risks and disadvantages to consider.
Home equity loans: What are they?
A home equity loan lets you trade some of your home equity for a cash payout. Like any other mortgage, it’s secured by your home, but home equity loans are a special type of mortgage called second mortgages — this means that you can borrow one while also repaying a primary home loan. And if you go into mortgage default and the home is sold to pay your debt, the home equity loan will be paid off second, after your first mortgage.
What is home equity?
How a home equity loan works
Home equity loans have fixed interest rates, meaning you can enjoy consistent payments that won’t change over time. Once you’re approved, you can use the cash from a home equity loan to pay for almost anything — from home improvements to medical bills or other debts.
But it’s important to know that, if you can’t make your payments, your home equity lender can take your house since it is the collateral. So while they can be a great way to borrow money at a reasonable interest rate, home equity loans come with a big risk.
Home equity loan example
Let’s say your home is worth $300,000 and you still owe $100,000 on your first mortgage:
→ 85% of $300,000 is $255,000
→ Subtract your $100,000 balance from $255,000, and you end up with $155,000
→ So, you can likely borrow up to $155,000 with a home equity loan
Home equity loan pros and cons
| Stable, fixed monthly payment. The predictability of a home equity loan's payments can make budgeting easier. Tax benefits. The interest you pay may be tax-deductible if the loan proceeds are used for home improvements. Lower costs and fees. Home equity loan closing costs are typically more affordable than what you'd pay with a cash-out refinance. Flexibility. Home equity loan funds can be used for any purpose. | Interest rates. Interest rates are competitive with many loan types, but higher than cash-out refinance loans. Multiple payments. You'll have two monthly mortgage payments if you take out a second mortgage while still repaying a first mortgage. Possibility of foreclosure. If you default on the loan, your lender could repossess your house. High bar to qualify. The financial profile needed to qualify is stricter than you'd find with a cash-out refinance, credit card or personal loan. |
Read more in our full rundown of home equity loan pros and cons.
Home equity loan requirements
Here are the requirements what you usually need to meet to qualify for a home equity loan:
- A maximum 43% DTI ratio
Your debt-to-income (DTI) ratio compares your monthly debt payments to your monthly income — and home equity lenders generally set the maximum at 43%. - A minimum 620 credit score
Many lenders set their minimum score at 620, but some go as high as 660 or 680. If you need to go lower, you can search for lenders who specialize in home equity loans for bad credit. However, be prepared for lenders to limit your maximum LTV if your credit score is low, which will reduce how much you can borrow. - A maximum 85% LTV ratio
It’s standard for lenders to limit your LTV ratio to 85%, but if you need more borrowing power you can also find lenders who’ll go a bit higher — some will go to 90% or above.
Is it hard to get a home equity loan?
It’s not especially hard to get a home equity loan, but you will need to meet the minimum requirements listed above to qualify. Luckily, those requirements aren’t extraordinarily strict. The credit score requirement is on par with what you’d need to get a conventional mortgage loan, and the maximum LTV ratio is the same as you’d find with a HELOC.
You can usually close on a home equity loan in two to four weeks.
Is a home equity loan a good idea?
A home equity loan can be a good idea for you if you’re using it to:
Make necessary home improvements, especially those that will increase your home’s value
Pay off or consolidate debt
Fund a business venture that’ll turn a profit.
When is a home equity loan a bad idea?
If you’re tapping your home equity to pay for “wants” rather than “needs,” you’re entering risky territory. Putting your house on the line for nonessentials — especially ones that won’t pay for themselves — doesn’t usually make good financial sense.
How much home equity loan money can I get?
Usually, you can borrow up to 85% of your loan-to-value (LTV) ratio.
Most lenders set a cap on how much cash you can borrow with a home equity loan, and they usually express this limit as an 85% LTV ratio. If you know your home’s value and how much you owe on your first mortgage, you can use the calculator below to quickly estimate how much cash you can access with a standard home equity loan.
Home equity loan calculator: Estimate how much you can borrow
Keep in mind that most lenders will calculate your LTV by combining your first mortgage and the second mortgage you’re applying for. So, if you owe $300,000 on your home and want to take out a home equity loan for $50,000, your total loan balance is $350,000. If the home’s value is $450,000, your LTV would be about 78% ($350,000 divided by $450,000).
Looking for more cash? Some lenders offer high-LTV home equity loans that allow you to borrow up to 100% of your home’s value.Where can I get the best home equity loans?
Banks and credit unions are a solid bet for getting a home equity loan, but there are a number of competitive online home equity lenders that may be worth contacting. Ultimately, you should research lenders and comparison shop to get the best deal on a home equity loan. If you’re not sure where to start, check out our list of the best home equity lenders below.
Our picks for the best home equity loan lenders
| Lender | LendingTree rating | Available features | Lender review |
|---|---|---|---|
|  Best for low credit scores | 680 minimum credit score 90% LTV with higher score $45K minimum draw | Read our review |
|  Best for high LTV ratios | 5- to 30-year terms No-closing-cost options 100% LTV for qualified borrowers | Read our review |
|  Best for online experience | 5- to 30-year terms $10K to $500K loan amounts 0.25% rate discount for eligible borrowers | Read our review |
| Best for rate and closing cost discounts | 5- to 30-year terms 0.50% rate discount for eligible borrowers No upfront fees | Read our review |
| Best for fast closings | 5- to 30-year terms $500K maximum loan amount 14-day closings possible | Read our review |
Read more about how we chose our best home equity loan lenders.How to get a home equity loan
The easiest way to figure out how much money you could qualify for with a home equity loan is to use an online home equity loan calculator. If you’d like to do the math by hand, simply multiply your home’s value by 85% (0.85), then subtract what you have left to pay on your current mortgage. The result is a rough estimate of your maximum home equity loan amount with an 85% LTV maximum.
How much debt and income do you have? How much room in your budget does that leave for a home equity loan payment? To help answer this question, you may want to calculate your DTI. If it’s over 43%, a home equity loan may not be an option for you. Ways to reduce your DTI include getting a cosigner, working on paying off old debts or increasing your income.
Reach out to three to five lenders and see what kind of home equity loan terms they may be willing to offer you. You can get started by comparing our picks for the best home equity lenders.
To finalize the loan, you’ll need to pay your home equity loan closing costs — which often range from 2% to 5% of your loan amount—and sign some paperwork. Then you are free to use the cash as you need!
Current average home equity loan rates
LOAN AMOUNT |
APR AS LOW AS |
|
$25,000
|
6.99%
|
|
$50,000
|
6.99%
|
|
$100,000
|
7.13%
|
|
$150,000
|
6.99%
|
How home equity loan interest rates compare to other loan types
When searching for a way to access some extra cash, interest rates you’ll pay are probably an important factor in your decision. There are some alternative options to home equity loans that you may consider — which we will dive into later — so understanding how rates compare between these choices will help you choose the best one for you.
- Home equity loan vs cash-out refinance rates: Home equity loans usually have higher
rates than cash-out refinances. - Home equity loan vs home equity line of credit (HELOC) rates: Home equity loans usually have lower rates than HELOCs.
- Home equity loan vs personal loan rates: Home equity loans tend to have lower rates than personal loans.
rates than cash-out refinances.
rates than HELOCs.
| Cash-out refinance | Home equity loan | HELOC | Personal loan | Credit card | |
|---|---|---|---|---|---|
| How expensive are interest rates? | |||||
| Typical interest rate | 6.74% | 6.99% | 7.49% | 5.99-35.99% | 24.59% |
Home equity loan vs. home equity line of credit (HELOC)
Similar to a home equity loan, a HELOC is a second mortgage that allows you to convert some of your home equity into cash. The main difference is that a HELOC is a revolving line of credit, like a credit card, that comes with a variable interest rate.
During the HELOC draw period, you can use and reuse the credit line as many times as you need, as long as you don’t exceed the limit. Many times, you have the advantage of low, interest-only payments during this phase. But once the repayment period begins, you can’t withdraw from the credit line anymore and must repay the loan balance and interest in full.
When a HELOC may be a better choice:
A HELOC is a good choice for borrowers who know they want to make several purchases or cover ongoing expenses, or those who could benefit from interest-only payments during the draw period.
Still not sure which is right for you? Read our article comparing home equity loans versus HELOCs.
Home equity loan vs. cash-out refinance
A cash-out refinance is when you take out a new mortgage to replace your current home loan. The new loan balance covers more than just your outstanding mortgage — it’s large enough to allow you to also pocket the remaining difference in cash.
When a cash-out refinance may be a better choice:
A cash-out refinance is a good option for those who can use a refinance to get better loan terms. However, if your existing mortgage rate is significantly lower than current refinance rates, you probably won’t want to replace it with a loan that will cost you more in the long run.
Still unsure which is right for you? Read our comparison of cash-out refinances vs home equity loans vs HELOCs.
Home equity loan vs. personal loan
A personal loan is an unsecured loan that pays you a lump sum of cash. Unlike the other options we’ve mentioned, it doesn’t tie your new debt to your home. This can offer some peace of mind — but because there’s no collateral securing a personal loan, they generally come with higher interest rates.
Learn more about personal loan requirements.
Frequently asked questions
The principal balance of a home equity loan is not tax deductible, but the interest you pay on it may be. According to IRS rules, if you used the funds to “buy, build or substantially improve” your home, you can deduct the interest. However, there are caps on how much interest you can deduct that vary depending on when you took out the loan and whether you’re a single or joint tax filer.
Most lenders require at least a 620 credit score to qualify for a home equity loan or HELOC.
It is possible to get a home equity loan with bad credit but you’ll usually have to pay a higher interest rate. In many cases, you may also have to show the lender that you have more income, more home equity and less total debt than their usual requirements stipulate.
Applying for and accepting a new loan will bring your credit score down by a few points but, as long as you stay on top of your payments, the effect should only last a few months.
You can use the money from a home equity loan for any purpose. Common uses include debt consolidation, education costs, home improvements and business startup costs.
Home equity loan closing costs are usually about 2% to 5% of your loan amount. According to a recent LendingTree study, the average home equity loan borrowers paid between $1,600 to $4,000 in closing costs.