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How Does LendingTree Get Paid?

LendingTree is compensated by companies on this site and this compensation may impact how and where offers appear on this site (such as the order). LendingTree does not include all lenders, savings products, or loan options available in the marketplace.

Home Equity Loan Rates

2.24%

You’ll find home equity loan rates are often higher than interest rates on traditional mortgages. The more home equity you borrow, the higher your rate will typically be. Your credit score also has an impact on the rate you’re offered.

How to get home equity loan offers

1. Click on the Compare Free Offers button above
3. Tell us your purpose for using the home equity loan and how much you want to borrow
5. Get your personalized home equity loan rate quotes

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 may also be called a second mortgage, since it’s usually attached to a home already secured by a first mortgage.

What is home equity?

Home equity is the difference between your home’s market value and the amount you owe on your mortgage. For example, if your home is worth \$400,000 and your first mortgage balance is \$300,000, you have \$100,000 worth of home equity.

How is my home equity loan amount calculated?

If you’re a numbers person, here are the steps you’d take to calculate the home equity loan amount with a maximum 85% LTV ratio on a \$400,000 home with a \$300,000 mortgage balance.

1. Multiply your home’s value by 85% (0.85):                      \$400,000 x 85%  = \$340,000
2. Subtract your loan balance from the result:                     \$340,000 – \$300,000 = \$40,000
3. The result is your maximum home equity loan amount: \$40,000

If you’d like to streamline the process, use our home equity loan calculator.

How does a home equity loan work?

In many ways, a home equity loan works like a regular, fixed-rate first mortgage.

1. The lender will qualify you based on your income, debt and credit scores
2. You’ll get a home appraisal to verify your home’s value
3. You’ll typically get a fixed interest rate and pay closing costs

Terms usually range between five and 30 years, and most lenders set loan-to-value (LTV) ratio  limits on how much you can borrow. Your LTV ratio measures how much of your home’s value you borrow, and the maximum LTV ratio for a home equity loan is often 85%.

Home equity loan requirements

Guidelines for home equity loans are usually more stringent than first mortgage cash-out refinance loans. Although the rules will vary from lender to lender, you’ll typically need to meet the following general requirements to qualify:

43% maximum DTI ratio. Lenders divide your total debt by your pretax income to calculate your debt-to-income (DTI) ratio. The standard home equity guideline maximum DTI ratio is 43%.

620 minimum credit score. Although lenders may set the bottom score limit at 620, others may set higher minimums between 660 and 680. If you’re looking for a home equity loan with bad credit, expect a higher rate and more limits on your maximum DTI or LTV ratio.

85% maximum LTV ratio. You’ll usually need at least 15% equity to get a home equity loan. However, some specialty home equity loan lenders will set LTV ratios at 90% or higher.

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.

Pros and cons of home equity loans

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

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 make 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

Can I get a home equity loan with bad credit?

Although it’s possible to get a home equity loan with bad credit, you may not qualify for as much as you need or want. Lenders may reduce your maximum LTV ratio and will probably charge you a significantly higher interest rate. If your scores are below 620, consider a government-backed cash-out refinance program. Here are a few worth noting:

• FHA cash-out refinance. The Federal Housing Administration (FHA) insures loans for borrowers with credit scores as low as 500 on an FHA cash-out refinance. A couple of caveats: You’ll pay expensive FHA mortgage insurance and won’t be able to borrow more than 80% of your home’s value.
• VA cash-out refinance. Eligible military borrowers may be able to tap up to 90% of their home’s value with a loan guaranteed by the U.S. Department of Veterans Affairs (VA). VA cash-out refinance guidelines don’t set a minimum credit score, but many lenders set theirs at 620.

Home equity loans vs. HELOCs

Consumers sometimes confuse home equity loans with home equity lines of credit, or HELOCs for short, but they work very differently. A HELOC works more like a credit card with the flexibility to pay off the balance and charge it again during a set time called a draw period, which usually lasts 10 years. Once the draw period ends, the remaining balance is paid in fixed installments. Here are some other important HELOC features:
• 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 make interest-only payments each month, which means you don’t pay down your loan balance.
• The payments are only based on what you use. 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, your current first mortgage is replaced with a larger first mortgage and you 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 ages 62 years or older may be able to convert their home equity to cash, monthly income or a line of credit through a reverse mortgage. Rather than having to make a payment on the amount borrowed, the interest is added to the loan each month.

• 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 your home’s estimated value after improvements to calculate your maximum loan amount, instead of basing it on the home’s current condition.