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Understanding Home Equity Loans

A home equity loan, often called a "second mortgage," allows you to borrow against the equity in your home. Unlike a HELOC (Home Equity Line of Credit), a home equity loan provides a lump sum payment upfront with a fixed interest rate and fixed monthly payments over a set term.

How Home Equity Loans Work

Loan Amount: Most lenders allow you to borrow up to 80-85% of your home's value, minus what you owe on your first mortgage. For example, if your home is worth $400,000 and you owe $250,000, you have $150,000 in equity. At 80% LTV, you could borrow up to $320,000 total ($400,000 × 0.80), meaning you can access up to $70,000 in a home equity loan.

Fixed Rate & Payment: Home equity loans have fixed interest rates, so your monthly payment stays the same for the entire loan term. This predictability makes budgeting easier compared to variable-rate HELOCs.

Loan Terms: Common terms range from 5 to 30 years. Shorter terms mean higher monthly payments but less total interest paid. Longer terms reduce your monthly payment but increase the total interest cost.

Home Equity Loan vs. HELOC: Key Differences

Home Equity Loan (Second Mortgage):

Lump sum payment upfront
Fixed interest rate
Fixed monthly payments
Pay interest on the entire amount from day one
Best for: One-time expenses like home renovations, debt consolidation, or major purchases

HELOC (Home Equity Line of Credit):

Revolving credit line (like a credit card)
Variable interest rate
Draw period (typically 10 years) then repayment period (typically 10-20 years)
Pay interest only on what you borrow
Best for: Ongoing expenses, emergencies, or projects with uncertain costs

Common Uses for Home Equity Loans

Home improvements: Kitchen remodels, bathroom upgrades, additions, new roof. These improvements can increase your home's value and the interest may be tax-deductible.
Debt consolidation: Pay off high-interest credit cards, personal loans, or student loans. Home equity rates are typically much lower than credit card rates (7-9% vs. 18-25%).
Education expenses: College tuition, graduate school. Rates are often better than private student loans.
Medical bills: Large medical expenses not covered by insurance.
Business funding: Start or expand a business (though consider SBA loans as an alternative).
Emergency expenses: Major car repairs, urgent home repairs, unexpected financial needs.

Qualification Requirements

To qualify for a home equity loan, lenders typically require:

Sufficient equity: At least 15-20% equity in your home (80-85% combined loan-to-value ratio)
Good credit score: Usually 620 minimum, but 700+ gets you the best rates
Stable income: Proof of employment and ability to repay
Low debt-to-income ratio: Typically 43% or less (all monthly debt payments ÷ gross monthly income)
Home appraisal: Lender will order an appraisal to confirm your home's current value

Interest Rates & Closing Costs

Current rates: As of 2026, home equity loan rates typically range from 6.5% to 9%, depending on your credit score, loan amount, and lender. Rates are usually 0.5-1% higher than first mortgage rates but much lower than credit cards or personal loans.

Closing costs: Expect to pay 2-5% of the loan amount in closing costs, which may include:

Application fee: $75-$300
Appraisal fee: $300-$700
Origination fee: 0.5-1% of loan amount
Title search and insurance: $700-$1,200
Attorney fees: $500-$1,000 (in some states)
Recording fees: $50-$250

Some lenders offer no-closing-cost home equity loans, but you'll typically pay a higher interest rate to compensate.

Tax Deductibility

Under the Tax Cuts and Jobs Act, interest on home equity loans is tax-deductible ONLY if you use the funds to "buy, build, or substantially improve" the home that secures the loan. The deduction is limited to interest on up to $750,000 of total mortgage debt ($375,000 if married filing separately).

Deductible: Using a home equity loan to build an addition, remodel the kitchen, or replace the roof.

NOT deductible: Using the loan for debt consolidation, car purchases, vacations, or college tuition.

Consult a tax professional to understand how this applies to your situation.

Risks to Consider

Foreclosure risk: Your home is collateral. If you can't make payments, you could lose your home.
Reduced equity: Taking out a home equity loan reduces your ownership stake and could leave you underwater if home values decline.
Closing costs: The 2-5% in fees can add thousands to smaller loans, making them less cost-effective.
Extended debt: A 15-year home equity loan means you're paying for today's expenses for 15 years into the future.
Resale complications: If you sell your home, you must pay off both mortgages from the sale proceeds.

Alternatives to Home Equity Loans

Cash-out refinance: Replace your existing mortgage with a new, larger one and take the difference in cash. This can make sense if current mortgage rates are lower than your existing rate.

HELOC: If you don't need the full amount upfront or prefer flexibility, a HELOC lets you borrow only what you need when you need it.

Personal loan: Unsecured personal loans don't put your home at risk, but rates are typically higher (10-15% or more).

0% balance transfer credit card: For debt consolidation under $20,000, a 0% intro APR card (12-21 months) can save on interest if you can pay it off during the promo period.

Frequently Asked Questions

How much can I borrow with a home equity loan?

Most lenders allow you to borrow up to 80-85% of your home's value minus your existing mortgage balance. For example, if your home is worth $400,000 and you owe $250,000, you have $150,000 in equity. At 85% combined LTV, you could borrow up to $340,000 total, meaning up to $90,000 via a home equity loan. Factors like credit score, income, and debt-to-income ratio also affect how much you can borrow.

What's the difference between a home equity loan and a HELOC?

A home equity loan gives you a lump sum upfront with a fixed interest rate and fixed monthly payments, similar to a personal loan. A HELOC is a revolving line of credit with a variable rate that you can draw from as needed during a draw period (typically 10 years). Home equity loans are better for one-time expenses with predictable costs, while HELOCs work well for ongoing expenses or projects with uncertain costs.

How long does it take to get a home equity loan?

The typical timeline is 2-6 weeks from application to funding. This includes the appraisal (1-2 weeks), underwriting (1-2 weeks), and closing (scheduled after approval). Some online lenders can close in as little as 2 weeks, while traditional banks may take 4-6 weeks. The speed depends on how quickly you provide documentation, the appraisal scheduling, and the lender's processing time.

Is home equity loan interest tax deductible?

Interest is tax-deductible only if you use the loan to buy, build, or substantially improve the home securing the loan. If you use it for debt consolidation, car purchases, or other expenses, the interest is NOT deductible. The deduction is limited to interest on up to $750,000 of total mortgage debt. Keep receipts and documentation if you plan to deduct the interest. Consult a tax professional for personalized advice.

Can I get a home equity loan with bad credit?

It's possible but challenging. Most lenders require a minimum credit score of 620-640, though some specialized lenders accept scores as low as 580-600 with higher interest rates and lower LTV limits (maybe 70% instead of 85%). You'll also need substantial equity, stable income, and a low debt-to-income ratio. Consider improving your credit score first, as even a 50-point increase can save you thousands in interest over the loan term.

What happens to my home equity loan if I sell my house?

You must pay off the home equity loan (and your first mortgage) when you sell. The loan payoff comes from your sale proceeds. For example, if you sell for $400,000, owe $250,000 on your first mortgage and $50,000 on your home equity loan, you'd pay off $300,000 in debt and receive $100,000 (minus closing costs and commissions). If you don't have enough equity to cover both loans, you'll need to bring cash to closing or negotiate a short sale.

Should I choose a 10-year or 15-year home equity loan term?

A 10-year term means higher monthly payments but less total interest. A 15-year term lowers your monthly payment but increases total interest paid. For example, a $50,000 loan at 7.5% costs $594/month over 10 years ($21,255 total interest) vs. $464/month over 15 years ($33,479 total interest). Choose 10 years if you can afford the higher payment and want to minimize interest. Choose 15 years if you need lower monthly payments or want to keep more cash flow available.

Can I pay off a home equity loan early without penalty?

Most home equity loans have no prepayment penalties, but some lenders charge a fee if you pay off the loan within the first 2-5 years. Always ask about prepayment penalties before signing. If your loan has no penalty, making extra principal payments can save thousands in interest. Even an extra $100/month on a $50,000 loan at 7.5% can save $5,000+ in interest and shorten the loan by years.