Home Equity Loans: Rates, Requirements, and How They Work

A home equity loan (HELoan) is a type of loan that lets you use the value you’ve built in your home. You can borrow against the difference between your home’s current market value and what you still owe.

It’s also known as a second mortgage because it also relies on your house as collateral, just as your primary mortgage does. Your interest rate, loan amount, and costs depend on your lender, credit score, and credit history.

Let’s dive into how HELoans work, how to use them, and how they compare to a home equity line of credit (HELOC) and other borrowing alternatives.

What Is a Home Equity Loan?

A home equity loan is a fixed-rate loan that lets you borrow money against your home’s equity, which is the difference between the value of your home and your current mortgage balance.^[2] You receive a lump sum up front and repay it in fixed monthly payments over a set loan term, usually five to 30 years.

Here’s an example of how a home equity loan works:

Loan Factor	Amount
Home value	$300,000
Mortgage balance	$200,000
Total equity	$100,000
Maximum HELoan amount (80%)	$80,000

Lenders typically allow you to borrow up to 80% of your home’s equity as a second mortgage.

How much equity you can borrow depends on your combined loan-to-value (CLTV) ratio. It’s the difference between what you still owe on your primary mortgage and your appraised property value. Well-qualified borrowers may be able to borrow up to 90%.

How Do Home Equity Loans Work?

A home equity loan works by converting your home’s equity into cash you repay to the lender at a fixed interest rate over time. Equity is the portion of your home you truly own. As your property value rises, or your mortgage payments reduce your outstanding balance, your equity grows.

Here’s how the lending process works for a HELoan:

• Apply with a lender by submitting a loan application and supporting documents.

• The lender reviews your credit score, payment history, income, and DTI.

• An appraiser assesses your home’s condition and recent sales of similar properties in your area to determine its value.

• The lender approves you for a loan amount based on your CLTV (or LTV if you’ve paid off your house).

• You sign the new loan documents, pay closing costs, receive the lump-sum payment, and begin monthly repayments.

Home Equity Loan vs. HELOC: Key Differences

A home equity loan gives you a lump sum with a fixed interest rate. A HELOC is a credit line you can borrow from as needed with a variable interest rate.

With a HELoan, you receive the full loan amount up front and start repayment right away, making fixed monthly payments for the life of the loan. A HELOC works more like a credit card. It typically has a variable annual percentage rate (APR). You can borrow as needed during a set draw period. As you pay down the balance, that credit becomes available to use again.^[3]

Over time, HELOC payments can change as rates adjust with market conditions. HELoan payments stay the same, making each loan option better suited for different financial needs.

Here’s how they compare side by side.

Loan or Borrowing Factor	Home Equity Loan	HELOC
Loan structure	Loan	Revolving line of credit
Interest rate	Fixed	Variable
Payment	Lump sum	Draw as needed
Loan amount range	Fixed up front	Flexible borrowing limit
Closing costs	Yes	Yes
Risk level	Low	High
Flexibility	Low	High
Repayment term	Fixed	Draw and repayment period
Approval time	Two to eight weeks	One to six weeks
Credit score	620 or higher	620 or higher
Debt-to-income ratio	43% or lower	43% or lower
Best for	Large, one-time expenses	Ongoing or fluctuating expenses

Home equity loan basics

Here are the key elements of HELoans:

• Disbursement: Lump sum

• Interest rate: Fixed

• Repayment term: Fixed, usually 5–30 years

• Monthly payments: Predictable and fixed

• Best for: One-time, large purchases or expenses

HELOC Basics

Here are the characteristics of HELOCs:

• Disbursement: Revolving credit line

• Interest rate: Variable

• Draw period: Usually up to 15 years

• Repayment period: Usually 10–20 years

• Monthly payments: Interest-only during draw period, principal plus interest during repayment period

• Best for: Ongoing or uncertain expenses

Home Equity Loan Rates and Costs

Home equity loan rates typically align with the broader mortgage rate environment, rising or falling with market conditions. Currently, rates range from around 6% to 12% APR.

Besides interest, you’ll also pay closing costs and other fees when finalizing the loan. These vary widely by lender. Common costs include:

• Origination fees: 0.5%–1% of loan amount

• Appraisal fees: $300–$2,000

• Title search fees: $75–$300

• Closing costs: 2%–6% of loan amount

Your annual percentage rate (APR) depends on your credit score, loan term, amount of equity you’re borrowing, and the lender. The higher your interest rate, the more you’ll pay in total interest over the life of the loan.

The table below shows estimated monthly payments and total interest paid for a $50,000 home equity loan over 10 years, depending on the interest rate.

Example APR	Estimated Monthly Payment	Total Interest Paid
6%	$555	$16,612
6.5%	$568	$18,129
7%	$581	$19,665
7.5%	$594	$21,221
8%	$607	$22,797
8.5%	$620	$24,391
9%	$633	$26,005
9.5%	$647	$27,639
10%	$661	$29,290
11%	$689	$32,650
12%	$717	$36,083

Home Equity Loan Requirements and Qualifications

Every lender sets its own guidelines, but most look for similar financial qualifications. 

You’ll typically need to meet the following minimum eligibility requirements to qualify for a home equity loan:

• Credit score: 620, but higher scores qualify for lower interest rates

• Credit history: On-time payments, especially for your primary mortgage

• Debt-to-income (DTI) ratio: Typically 43% or below, but some lenders will go as high as 50% for borrowers with excellent credit

• Equity: Usually 10%–20% remaining after borrowing

• Monthly income: Stable income and employment history (will need to prove with pay stubs, bank statements, or tax returns)

How to Apply for a Home Equity Loan

The process is similar to when you got your first mortgage or refinanced. Timelines are estimates and will vary by lender.

1. Check your finances (One to two days): Review your credit score, calculate your DTI, and check your credit report for errors. Dispute any inaccuracies before applying.

2. Compare lenders (One to two days): Look at loan options, rates, and fees. Get pre-approval offers to find the lender with the best deal without affecting your credit score.

3. Submit your loan application (One to two days): Complete the lender’s application online or in person. Submit the necessary documents, which may include pay stubs, bank statements, W-2s or 1099s, property tax bills, and proof of homeowners insurance.

4. Complete the home appraisal (One to two weeks): The appraiser will confirm your property value and submit a report to your lender.

5. Underwriting (Two to four weeks): Your lender will review your credit profile, financial situation, CLTV, and other factors for final loan approval.

6. Closing (One week): Sign loan documents, then wait to receive your funds.

Common Uses for Home Equity Loans

Home equity loans work best for planned, large expenses, not everyday spending. Some of the most common ways homeowners use HELoans are:

• Home improvements or renovations: Equity loans allow you to spread costs out over time, rather than pay for a full renovation or upgrades all at once.

• Debt consolidation: Replaces high-interest credit cards with a lower fixed-rate loan with more predictable payments. Keep in mind that defaulting on your credit cards can harm your credit score. Defaulting on a home equity loan could result in foreclosure.

• Emergency expenses: If your emergency fund can’t cover an unexpected expense, such as medical bills, a flooded basement, or your HVAC system failing during the peak of summer, a HELoan can help cover the cost.

• Tuition costs: If you don’t qualify for federal student loans, a HELoan may offer lower rates than private student loans. Just make sure you compare them, as student loans may offer protections your equity loan doesn’t.  

Risks and Downsides of Home Equity Loans

A home equity loan is a second mortgage that uses your house as collateral to secure the loan. Since your home is on the line with this type of loan, consider the potential risks and downsides carefully before applying:

• Risk of foreclosure if you miss payments

• Closing costs and up-front fees

• Reduced home equity and borrowing power

• Limited flexibility due to the fixed loan amount

• If you borrow more than you need, you may have trouble making on-time payments

• Monthly payments add to your existing mortgage burden

• You could become “underwater,” or have negative equity in your home if its value declines

It’s important to weigh the risks of home equity loans against their potential benefits before you commit to one. Here’s a look at how they stack up:

HELoan Benefits	HELoan Risks
Fixed payments	Home foreclosure
Lower rates than credit cards	Closing costs
Large loan amounts	Higher DTI
Lump sum payment	Potential for overborrowing
Predictable payoff date	Reduced home equity

Home Equity Loans Alternatives

If a home equity loan isn’t the right fit, you have other options. A cash-out refinance might make sense if interest rates are low. Personal loans usually close faster, and you can get them without using your home as collateral, but you’ll usually pay higher interest. Credit cards have the highest rates and are really only good for short-term needs.

Here’s more about each alternative.

Cash-out refinance 

A cash-out refinance replaces your existing mortgage with a new, larger one and gives you the difference in cash.^[4] It works best when mortgage rates are lower than your current mortgage rate.

Personal loans

Personal loans are faster to fund and don’t require collateral, though you can use your house to secure it for a better rate. They typically come with higher interest rates and shorter repayment terms than home equity loans.

Credit cards

Credit cards offer immediate access to funds but carry high variable interest rates, which are usually higher than HELOCs. They’re best for short-term borrowing needs or smaller expenses you can repay quickly.

Home Equity Loan FAQs