A home equity loan enables you to borrow money by using your home as a down payment or assurance. This offers you a huge sum of loan and repayment comes with a fixed-rate interest based on the predetermined term. Home equity loans stand as one of the factors to know as worthy your home is. But the risk is that, since you’re using your home as assurance or collateral for equity, failure to repay your loan could risk you losing your home. Therefore, if choose to take out a home equity loan, there are certain things you need to know.
What is a Home Equity Loan?
A home equity loan can be referred to as an equity loan, home equity installation loan or second mortgage loan serves as a type of loan where you receive cash in the form of a massive payment. Simply, you can say it is a type of customer debt. To repay the loan includes a fixed interest rate, but depends on whether you have enough equity.
As for equity, it is the difference between the worth of your home and the amount of mortgage you owe. A regular payment or down payment on your mortgage is one factor that helps to increase or grow your home equity. Most importantly when real estate value increases in your area, the makes your equity grow even faster.
How do home equity loans work?
Home equity loans work like every other loan, but even more than what other types of loans will offer you. When you apply for a home equity loan, you’ll receive a lump sum of money at once. However, your equity serves as collateral for the lender which might include your home. The amount of money you can borrow depends on certain factors that include a combined loan-to-value (CLTV) ratio of about 80% to 90% of the value of your home.
Traditional home equity loans come with a repayment term similar to conventional mortgages. Repayment of a loan includes a regular and fixed payment to cover both the principal and interest. Similar to other loans, if you don’t repay your loans, the house you use as collateral will be sold to clear off the remaining debt.
What Can You Use a Home Equity Loan For?
Home equity loans offer flexibility and can be used for various purposes, including:
- Home Improvements: Renovations, repairs, additions, and upgrades.
- Debt Consolidation: Combining high-interest debts into one lower-interest loan.
- Education Expenses: Funding college or other educational pursuits.
- Medical Expenses: Covering unexpected medical bills.
- Major Purchases: Financing a car, boat, or other significant purchase.
- Starting a Business: Providing capital for entrepreneurial ventures.
How much can you borrow with a home equity loan?
Just like I stated earlier, the amount you can borrow with a home equity loan is determined by the CLTV ratio which is about 80% to 90% of the home worth value. This will be minus the amount you own on your mortgage. You can perform the calculation to estimate how much you can be able to borrow with a home equity loan.
Requirements for Home Equity Loan
The requirement or qualification to apply for a home equity loan depends on the lender. Each lender has different qualification requirements that you need to have. Generally, here are the following requirements you might be asked:
- Home equity of at least 15% to 20%.
- Have a good or excellent credit score of about 620 or higher.
- A debt-to-income ratio of 43% or lower.
Also, in order for the confirmation of your home value in market value, your lender might request an appraisal to determine the approval for how much you want to borrow or are eligible to borrow.
Home Equity Loan Calculator
A home equity loan calculator can help you estimate the monthly payments and total cost of borrowing against the equity in your home. Here’s a breakdown of what you’ll typically need and how to use one:
Information Needed:
- Home Value: The current market value of your home. You can get an estimate from online tools, a recent appraisal, or a real estate agent.
- Outstanding Mortgage Balance: The remaining amount you owe on your primary mortgage.
- Loan Amount: How much money you want to borrow.
- Interest Rate: The current interest rate for home equity loans. This will vary based on your credit score, loan amount, and lender.
- Loan Term: The length of time you have to repay the loan (e.g., 10 years, 15 years, 30 years).
How to Use a Home Equity Loan Calculator
- Find a Calculator: Many banks, credit unions, and online financial websites offer home equity loan calculators.
- Enter Your Information: Input the required information mentioned above into the calculator fields.
- Review the Results: The calculator will generate an estimate of your monthly payment and the total interest you’ll pay over the life of the loan.
Is home equity loans worth it?
However, if you’re considering whether home equity loans are worth it or a good idea, however, this depends on you and also your financial situation. Your home is used as collateral and failure to pay it back, you risk losing your home to pay off your debt.
Pros and Cons of Home Equity Loans
Pros
- Lower interest rates: Home equity loans typically have lower interest rates compared to personal loans or credit cards.
- Fixed interest rates: This means your monthly payments will remain the same throughout the loan term, making budgeting easier.
- Lump sum payment: You receive the entire loan amount upfront, which can be useful for large expenses like home renovations or debt consolidation.
- Potential tax benefits: In some cases, the interest you pay on a home equity loan may be tax-deductible if the funds are used for home improvements.
Cons
- Risk of foreclosure: If you fail to make your payments, you could lose your home.
- Reduced equity: Taking out a home equity loan reduces the equity you have in your home.
- Closing costs: You’ll typically have to pay closing costs, which can add to the overall cost of the loan.
- May not be ideal for short-term needs: Home equity loans are typically best for long-term needs due to the fixed interest rate and repayment schedule.
- It’s important to weigh the pros and cons carefully before deciding if a home equity loan is right for you. Consider your financial situation, the purpose of the loan, and your ability to repay it.
Top Home Equity Loan Lenders
Third Federal Savings and Loan
- Pros: High Bankrate Score (4.5/5), wide range of loan amounts ($10,000-$300,000), flexible term lengths (5-30 years)
- Cons: Undisclosed minimum credit score
- Why they stand out: Known for strong customer satisfaction and competitive rates
BMO
- Pros: High Bankrate Score (4.5/5), good for affordability with below-average rates and introductory offers, no application fees, low/no closing costs
- Cons: Requires a 700 minimum credit score, branches not available in all states
- Why they stand out: Excellent choice for those prioritizing affordability and low fees
Discover
- Pros: High Bankrate Score (4.4/5), competitive rates, no application, appraisal, or origination fees, high loan amounts ($35,000-$300,000)
- Cons: Requires a 680 minimum credit score (700 or higher for $150,000 or more), no branches
- Why they stand out: Great for those seeking low rates and a digital-first experience
U.S. Bank
- Pros: High Bankrate Score (4.2/5), wide range of loan amounts ($15,000-$750,000), available in most states
- Cons: Requires a 660 minimum credit score
- Why they stand out: Strong nationwide availability and varied loan options
TD Bank
- Pros: Good Bankrate Score (4.1/5), offers online rate quotes, allows borrowing against investment properties
- Cons: Requires a 660 minimum credit score
- Why they stand out: Convenient online experience and flexible borrowing options
Home Equity Loan Rates & Costs
- Average Rate: As of mid-February 2025, the average interest rate for a home equity loan is around 8.40%. Keep in mind that this is an average, and you might find rates higher or lower depending on various factors.
- Rate Range: You’ll likely see rates ranging from about 8.04% to 9.24%. The lower end of the range is typically for borrowers with excellent credit and those who meet specific lender criteria.
- Fixed vs. Variable: Unlike HELOCs (Home Equity Lines of Credit), home equity loans usually come with fixed interest rates. This means your rate stays the same throughout the loan term, which can help with budgeting.
Factors Affecting Home Equity Loan Rates
- Credit Score: A higher credit score generally qualifies you for lower interest rates.
- Loan Amount: Larger loan amounts might have slightly higher rates.
- Loan Term: Shorter loan terms sometimes come with lower interest rates, but your monthly payments will be higher.
- Home Equity: The amount of equity you have in your home plays a role. Lenders want to see a healthy amount of equity.
- Lender Policies: Each lender has its own criteria and risk assessment models, which influence the rates they offer.
- Market Conditions: Overall economic factors and prevailing interest rates in the market also play a role.
Costs Associated with Home Equity Loans
Besides the interest rate, be aware of these potential costs:
- Appraisal Fees: Lenders typically require an appraisal to determine your home’s current market value.
- Closing Costs: These can include fees for things like title search, loan origination, and recording fees.
- Prepayment Penalties: Some lenders might charge a fee if you pay off your loan early.
- Annual Fees: Though less common with home equity loans than HELOCs, some lenders might have annual fees.
Tips for Getting the Best Rates and Costs
- Improve Your Credit Score: A higher credit score is your golden ticket to lower rates.
- Shop Around: Compare offers from multiple lenders to find the most competitive rates and fees.
- Negotiate: Don’t hesitate to negotiate with lenders, especially if you have a strong financial profile.
- Consider a Shorter Term: If you can afford the higher monthly payments, a shorter loan term can save you on interest costs.
- Read the Fine Print: Always understand all the terms and conditions before agreeing to a loan.
Comparing Home Equity Loans
1. Home Equity Loan vs. HELOC (Home Equity Line of Credit)
| Feature | Home Equity Loan | HELOC |
| Loan Amount | Lump sum, received upfront | Revolving credit line, draw funds as needed |
| Interest Rate | Typically fixed | Usually variable (can fluctuate) |
| Repayment | Fixed monthly payments | May have interest-only period, then payments increase |
| Best For | One-time expenses (renovations, debt consolidation) | Ongoing needs, flexible spending (education, emergencies) |
Key Considerations:
- Predictability: Home equity loans offer predictable payments with a fixed rate, while HELOCs have variable rates that can change.
- Flexibility: HELOCs provide flexibility to borrow and repay as needed, while home equity loans are a one-time lump sum.
- Risk: Both use your home as collateral, so failure to repay can lead to foreclosure.
2. Home Equity Loan vs. Cash-Out Refinance
| Feature | Home Equity Loan | Cash-Out Refinance |
| Loan Structure | Second mortgage, in addition to your existing one | Replaces your existing mortgage with a new, larger one |
| Interest Rate | Usually higher than your original mortgage | May be lower than current market rates |
| Impact on Existing Mortgage | Doesn’t change your original mortgage terms | Changes your original mortgage terms, potentially lowering your rate or monthly payment |
| Best For | Smaller amounts, keeping your original mortgage intact | Larger amounts, potentially lowering your overall mortgage cost |
Key Considerations:
- Amount Needed: Cash-out refinance might be better for larger sums, while home equity loans are suitable for smaller amounts.
- Interest Rate: Cash-out refinance might offer lower rates, but it depends on current market conditions.
- Complexity: Cash-out refinance involves more paperwork and a new mortgage, while a home equity loan is a simpler process.
3. Comparing Home Equity Loan Offers
- Interest Rates: This is the most crucial factor. Look for the lowest APR (Annual Percentage Rate).
- Fees: Pay attention to all fees:
- Application fees
- Appraisal fees
- Origination fees
- Closing costs
- Prepayment penalties
- Loan Terms: Consider the length of the loan and the repayment schedule.
- Loan Amount: Ensure the lender offers the amount you need.
- Credit Score Requirements: Check if you meet the lender’s credit score criteria.
- Reputation and Customer Service: Read reviews and ratings to gauge the lender’s reliability and customer service quality.
Tips for Comparing Offers
- Get Quotes from Multiple Lenders: Shop around and compare offers from banks, credit unions, and online lenders.
- Use Online Comparison Tools: Websites like Bankrate, LendingTree, and NerdWallet can help you compare offers side-by-side.
- Don’t Just Focus on the Lowest Rate: Consider the whole package, including fees and loan terms.
- Ask Questions: Don’t hesitate to ask lenders about anything you don’t understand.
How to Apply for a Home Equity Loan
- Check Your Credit Score: A good credit score increases your chances of approval and better interest rates.
- Compare Lenders: Shop around and compare interest rates, fees, and loan terms from different banks and credit unions.
- Gather Documentation: Prepare your financial documents, including income statements, tax returns, and bank statements.
- Complete the Application: Fill out the loan application accurately and completely.
- Undergo Appraisal: The lender will likely require an appraisal to determine your home’s current market value.
- Review and Close: Carefully review the loan terms and closing documents before signing.
Frequently Asked Questions (FAQs)
What is the difference between a home equity loan and a HELOC?
A home equity loan provides a lump sum of cash with a fixed interest rate and fixed monthly payments. A HELOC (Home Equity Line of Credit) offers a revolving line of credit with a variable interest rate, allowing you to borrow and repay funds as needed.
How much can I borrow with a home equity loan?
Lenders typically allow you to borrow up to 80-85% of your home equity, but this can vary depending on the lender and your financial situation.
What are the interest rates like for home equity loans?
Home equity loan interest rates are typically lower than unsecured loans or credit cards. They are usually fixed rates, offering predictable monthly payments.
Will a home equity loan affect my credit score?
Applying for a home equity loan can temporarily lower your credit score due to a hard inquiry. However, making timely payments on the loan can positively impact your credit score over time.
Are there any tax implications with a home equity loan?
In some cases, the interest paid on a home equity loan may be tax-deductible. Consult a tax professional for personalized advice.
What happens if I can’t repay my home equity loan?
Failure to repay your home equity loan could lead to foreclosure, as your home serves as collateral.
Can I use a home equity loan to pay off my mortgage?
While you could use a home equity loan to pay off your existing mortgage, it’s generally not recommended. You’d be replacing one loan with another, potentially adding to your overall debt and risk. Cash-out refinancing is a better option if you want to change your primary mortgage terms.
How long does it take to get a home equity loan?
The closing process for a home equity loan typically takes several weeks, depending on the lender and your individual circumstances.