A home equity loan lets you borrow money by tapping into the value of your home without selling it. Because your house acts as collateral, lenders often offer higher loan amounts and lower interest rates than personal loans or credit cards.
This can be a smart way to cover big expenses like renovations, debt consolidation, or education costs. But there are risks too—missed payments could put your home on the line. Before you decide, it’s important to understand how these loans work, what lenders look for, and whether this option makes sense for your situation.
Key Takeaways
- Home equity loans let you borrow against the value of your home, usually up to 80 percent of what it’s worth minus your mortgage balance.
- You can choose a lump sum with fixed payments or a home equity line of credit with flexible borrowing and variable rates.
- Approval depends on factors like your credit score, debt-to-income ratio, and how much equity you’ve built in your home.
What Is Home Equity, and How Do You Build It?
Home equity is the portion of your home that you truly own. It’s the difference between your home’s current market value and the balance you still owe on your mortgage.
For example, if your house is worth $300,000 and your mortgage balance is $180,000, your home equity is $120,000.
You build equity in two ways:
- Paying down your mortgage: Every monthly payment reduces your loan balance, which increases your ownership stake in the home.
- Rising home values: If the housing market strengthens and your property value goes up, your equity grows even if your mortgage balance stays the same.
The more equity you have, the more borrowing power you’ll have if you choose to take out a home equity loan or line of credit.
How Do Home Equity Loans Work?
A home equity loan lets you borrow money by using your home as collateral. Lenders usually allow you to access up to 80% of your home’s value, minus what you still owe on your mortgage.
Here’s an example: If your home is valued at $280,000 and your mortgage balance is $150,000, lenders may approve up to $224,000 (80% of $280,000). Subtract your mortgage balance, and you could borrow around $74,000.
There are two main ways to access the funds:
- Lump sum: You receive all the money at once, then repay it in fixed monthly installments with a set interest rate.
- Line of credit (HELOC): Works more like a credit card. You borrow as needed up to a set limit, with payments that adjust based on your balance and interest rate.
Both options use your home as security, which means failing to make payments puts your property at risk.
See also: Best Home Equity Loan Lenders of October 2025
Requirements to Qualify for a Home Equity Loan
Lenders are stricter today than they were before the 2008 housing crisis. Approval depends on more than just having equity in your home. Here are the common requirements:
- Sufficient equity: Most lenders require you to have at least 15%–20% equity built up in your home.
- Debt-to-income ratio: Your total monthly debt payments, including the new loan, typically can’t exceed 43% of your gross monthly income.
- Credit score: While some lenders approve borrowers with lower credit scores, you’ll usually need at least 620–640 for favorable terms. Higher scores mean better rates.
- Stable income: Proof of consistent employment or another reliable income source is required to show you can make payments.
- Property appraisal: Lenders will order an appraisal to verify your home’s current market value before finalizing the loan amount.
Meeting these standards increases your chances of approval and helps you secure a lower interest rate.
Current Home Equity Loan and HELOC Rates in 2025
Interest rates for home equity products change based on the market, your credit score, and the lender you choose. On average, here’s what you can expect in 2025:
- Home equity loans: Fixed APRs typically range from 6% to 10%. Borrowers with higher credit scores and more equity often qualify on the lower end.
- Home equity lines of credit (HELOCs): Variable APRs usually start around 7% to 12%, though some lenders may offer introductory rates that are temporarily lower.
Several factors influence the rate you receive:
- Credit score: A higher credit score generally earns you better terms.
- Loan-to-value ratio: The more equity you have, the less risk for the lender, which can lower your rate.
- Debt-to-income ratio: Keeping total debt payments under 43% of your income makes approval more likely and can improve your offered rate.
- Market conditions: Rates often move with Federal Reserve decisions and overall mortgage rate trends.
Because rates vary so much, it’s smart to get quotes from multiple lenders before committing. Even a one-point difference in APR can save thousands over the life of the loan.
Best Uses for a Home Equity Loan
Home equity loans give you flexibility, but some uses make more financial sense than others. Because your home is on the line, it’s best to reserve this type of borrowing for major expenses that add long-term value or help improve your financial situation.
Common uses include:
- Home improvements: Renovations, repairs, or upgrades that can increase your property’s value.
- Debt consolidation: Paying off high-interest credit cards or personal loans with a lower fixed rate.
- Education costs: Covering tuition or other school expenses when other options are less affordable.
- Medical bills: Managing large or unexpected healthcare expenses.
- Major purchases: Funding significant costs like a wedding or starting a business, though these should be weighed carefully.
Using a home equity loan for everyday spending or non-essential purchases is risky. Since your home secures the loan, missing payments could put your property at risk.
Home Equity Loan vs. HELOC: Key Differences
Both home equity loans and home equity lines of credit (HELOCs) let you borrow against your home’s value, but they work differently.
- Home equity loan: You get a lump sum upfront and repay it with fixed monthly payments over a set term. The interest rate is usually fixed, so your payment amount stays the same.
- HELOC: Works more like a credit card. You’re approved for a maximum limit, and you can borrow as much or as little as you need during the draw period. Payments may vary because HELOCs often have variable interest rates.
The best choice depends on your needs. If you prefer predictable payments and know exactly how much you need, a home equity loan is often better. If you want flexibility and ongoing access to funds, a HELOC may be more useful.
Pros & Cons of Home Equity Loans
A home equity loan comes with advantages and disadvantages, and it’s worth weighing both before applying.
Pros
- Lower interest rates: Rates are usually lower than unsecured personal loans or credit cards.
- Larger loan amounts: You can often borrow more than personal loans allow if you have enough equity.
- Predictable payments: Fixed rates and terms make it easier to plan your budget.
- Possible tax benefits: Interest may be deductible if funds are used for home improvements.
- Debt consolidation option: A way to pay off high-interest credit cards or other loans.
Cons
- Risk of foreclosure: Missing payments could result in losing your home.
- Closing costs: Some lenders charge fees upfront, adding to your total cost.
- Limited flexibility: Unlike a HELOC, you receive the money once and cannot borrow again without applying for a new loan.
- Tied to property value: Falling home prices could leave you owing more than your house is worth.
- Long repayment terms: Loan terms can last decades, which may not fit your goals.
How a Home Equity Loan Affects Your Credit Score
Taking out a home equity loan or HELOC can influence your credit score in both positive and negative ways. The impact depends largely on how you manage the account.
Positive effects:
- On-time payments: Consistently paying on time strengthens your payment history, which is the most important credit score factor.
- Credit mix: Adding a home equity loan or HELOC introduces another type of account, which can improve your overall credit profile.
- Available credit: With a HELOC, your credit utilization ratio may improve because you’ll have more available credit.
Negative effects:
- New credit inquiry: Applying for a home equity product results in a hard inquiry, which may cause a small, temporary drop.
- Higher balances: Borrowing large amounts increases your total debt, which can weigh down your credit score.
- Missed payments: Late payments are reported to the credit bureaus and can cause serious long-term damage.
How Long Do You Have to Repay a Home Equity Loan?
Repayment terms vary by lender, but home equity loans generally last five to 20 years, and in some cases up to 30 years. These loans typically have fixed interest rates, so you’ll make the same monthly payment until the loan is paid off.
For HELOCs, repayment works differently. The draw period usually lasts five to 10 years, during which you can borrow as needed and often only make interest payments. After that, the repayment period begins, and your monthly payments include both principal and interest.
Paying off a loan early is possible, though some lenders may charge prepayment penalties. Always review the fine print before signing.
Can You Sell Your Home With a Home Equity Loan?
Yes, you can sell your home even if you have an outstanding home equity loan or HELOC. The loan acts as a lien on the property and must be settled at closing.
Here’s how it works: the balance of your primary mortgage and your home equity loan are both subtracted from the sale price of the home. Whatever remains after paying off those debts and closing costs goes to you.
The risk comes if property values fall. If your home sells for less than what you owe on both loans combined, you’ll need to cover the difference out of pocket.
Shopping Around: How to Compare Lenders
Not all home equity loans are created equal. Rates, fees, and terms vary widely, so it pays to compare multiple offers before committing.
When reviewing lenders, consider:
- Interest rates: Even a small difference can save thousands over time.
- Closing costs and fees: Some lenders waive them, while others charge thousands upfront.
- Loan-to-value limits: Most cap borrowing at 80% of your home’s value, but some may be stricter.
- Reputation and customer service: Choose lenders known for transparency and strong borrower support.
- Flexibility: Look for features like no prepayment penalties or the option to lock in a fixed rate on part of a HELOC.
Getting quotes from at least three lenders gives you a clearer picture of what’s available and strengthens your negotiating power.
Bottom Line
A home equity loan can be a smart way to access large sums of money at lower interest rates compared to personal loans or credit cards. It also offers potential tax advantages if used for home improvements.
That said, borrowing against your home comes with serious risks. Missed payments could lead to foreclosure, and falling property values can leave you owing more than your house is worth.
Before moving forward, make sure you meet the qualifications, compare multiple lenders, and understand the repayment terms. Used wisely, a home equity loan or HELOC can provide valuable financial flexibility.
Frequently Asked Questions
Do home equity loans have closing costs?
Yes. Most lenders charge closing costs that range from 2% to 5% of the loan amount. These may include appraisal fees, title search fees, and application fees. Some lenders waive closing costs, but often in exchange for a slightly higher interest rate.
How much equity do I need to qualify for a home equity loan?
Most lenders require you to keep at least 15% to 20% equity in your home after the loan. That means you’ll generally need to have paid down enough of your mortgage or gained enough value in your home to meet that threshold.
Is it better to get a home equity loan or refinance my mortgage?
It depends on your needs. A home equity loan is usually better if you want to borrow a set amount without changing your existing mortgage. Refinancing may make sense if current mortgage rates are much lower than what you’re paying and you want to replace your original loan entirely.
Can I use a home equity loan for anything I want?
Yes, funds can be used for almost any purpose. Common uses include debt consolidation, home improvements, education expenses, or large purchases. Just remember that if you can’t make the payments, your home is at risk regardless of how you use the money.
Are home equity loan payments tax-deductible?
The IRS allows you to deduct interest only if the loan is used to buy, build, or substantially improve your home. Using the funds for personal expenses, debt payoff, or other non-home-related costs does not qualify for a deduction.
