What Is a Home Equity Loan? Your Guide to When It’s a Good Option
A home equity loan is a second mortgage you can use to borrow a large sum of money against your home. You can access lower rates than you’ll find with personal loans or credit cards because you’re using your home equity as collateral. This gives a nice boost to your borrowing power and is a great benefit of homeownership — but there are also risks and downsides to consider.
Home equity loans: What are they?
A home equity loan allows you to trade some of your home equity for a cash payout. Like any other mortgage, it’s secured by your home. However, a home equity loan is a special type of mortgage called a second mortgage — this means that you can borrow it while also repaying a primary home loan. If you go into mortgage default and the home is sold to pay your debt, the home equity loan will be paid off after your first mortgage.
You can use the cash from a home equity loan to pay for almost anything — from home improvements to medical bills or other debts.
What is home equity?
How much equity can I borrow from my home?
→ Usually, you can borrow up to 85% of your loan-to-value (LTV) ratio.
Most lenders set a cap on how much cash you can borrow with a home equity loan, and they typically express this limit as an 85% LTV ratio. If you know your home’s value and how much you owe on your first mortgage, you can use the calculator below to quickly estimate how much cash you can access with a standard home equity loan.
Keep in mind that most lenders will calculate your LTV by combining your first mortgage and the second mortgage you’re applying for. So, if you owe $300,000 on your home and want to take out a home equity loan for $50,000, your total loan balance is $350,000. If the home’s value is $450,000, your LTV would be about 78% ($350,000 divided by $450,000).
Looking for more cash? Some lenders offer high-LTV home equity loans that allow you to borrow up to 100% of your home’s value.How to qualify for a home equity loan
Here’s what you’ll typically need to qualify for a home equity loan:
- A maximum 43% DTI ratio
Your debt-to-income (DTI) ratio compares your monthly debt payments to your monthly income — and home equity lenders generally set the maximum at 43%. - A minimum 620 credit score
Many lenders set their minimum score at 620, but some go as high as 660 or 680. If you need to go lower, you can search for lenders who specialize in home equity loans for bad credit. However, be prepared for lenders to limit your maximum LTV if your credit score is low, which will reduce how much you can borrow. - A maximum 85% LTV ratio
It’s standard for lenders to limit your LTV ratio to 85%, but if you need more borrowing power you can also find lenders who’ll go a bit higher — some will go to 90% or above.
Home equity loan pros and cons
Stable, fixed monthly payment. The predictability of a home equity loan's payments can make budgeting easier. Tax benefits. The interest you pay may be tax-deductible if the loan proceeds are used for home improvements. Lower costs and fees. Home equity loan closing costs are typically more affordable than what you'd pay with a cash-out refinance. Flexibility. Home equity loan funds can be used for any purpose. | Interest.Interest rates are competitive with many loan types, but higher than cash-out refinance loans. Multiple payments. You'll have two monthly mortgage payments if you take out a second mortgage while still repaying a first mortgage. Possibility of foreclosure. If you default on the loan, your lender could repossess your house. High bar to qualify. The financial profile needed to qualify is stricter than you'd find with a cash-out refinance, credit card or personal loan. |
Read more in our full rundown of home equity loan pros and cons.
Where can I get the best home equity loans?
Banks and credit unions are a solid bet, though there are a number of competitive online home equity lenders that may be worth contacting. Ultimately, you’ll need to research lenders and comparison shop to get the best deal on a home equity loan. If you’re unsure of where to start, check out our list of the best home equity lenders below.
Summary: Our picks for the best home equity lenders
| Lender | LendingTree rating and "best of" category | Available features | Lender review |
|---|---|---|---|
|  Low credit scores | 680 minimum credit score 90% LTV with higher score $45K minimum draw | Read our review |
|  High LTV ratios | 5- to 30-year terms No-closing-cost options 100% LTV for qualified borrowers | Read our review |
|  Online experience | 5- to 30-year terms $10K to $500K loan amounts 0.25% rate discount for eligible borrowers | Read our review |
| Rate and closing cost discounts | 5- to 30-year terms 0.50% rate discount for eligible borrowers No upfront fees | Read our review |
| Fast closings | 5- to 30-year terms $500K maximum loan amount 14-day closings possible | Read our review |
Read more about how we chose our best home equity lenders.Alternatives to a home equity loan
Cash-out refinance
A cash-out refinance is when you take out a new mortgage to replace your current home loan. The new loan balance covers more than just your outstanding mortgage — it’s large enough to allow you to also pocket a lump sum of cash.
When a cash-out refinance may be a better choice:
A cash-out refinance is a good option for those who can use a refinance to gain better loan terms. However, if your existing interest rate is significantly lower than current refinance rates, you likely won’t want to replace it with a loan that will cost you far more in the long run.
Still unsure which is right for you? Read our comparison of cash-out refinances versus home equity loans versus HELOCs.
Home equity line of credit (HELOC)
Much like a home equity loan, a HELOC is a second mortgage that allows you to convert some of your home equity into cash. The main difference is that a HELOC is a revolving line of credit that comes with a variable interest rate.
During the draw period, you can use and reuse the credit line as many times as you need, as long as you don’t exceed the credit limit. In many cases, you can enjoy low, interest-only payments at the same time. However, once the repayment period begins, you can’t withdraw from the credit line anymore and must repay the balance in full, with interest.
When a HELOC may be a better choice:
A HELOC is a good choice for borrowers who know they want to make several purchases or cover ongoing expenses, or those who could benefit from interest-only payments during the draw period.
Still not sure which is right for you? Read our full article comparing home equity loans versus HELOCs.
Personal loan
A personal loan is an unsecured loan that pays you a lump sum. Unlike the other options we’ve mentioned, it doesn’t tie your new debt to your home. This can offer some peace of mind — but because there’s no collateral securing a personal loan, they generally come with higher interest rates.
Learn more about personal loan requirements.
How home equity loan interest rates compare to other loan types
Here’s how common alternatives to a home equity loan stack up:
| Cash-out refinance | Home equity loan | HELOC | Personal loan | Credit card | |
|---|---|---|---|---|---|
| How expensive are interest rates? | |||||
| Typical interest rate | 6.74% | 6.99% | 7.49% | 5.99-35.99% | 24.59% |
See current home equity loan rates today.
Is a home equity loan a good idea?
A home equity loan can be a good idea for you if you’re using it to:
Make necessary home improvements, especially those that will increase your home’s value
Pay off or consolidate debt
Fund a business venture that’ll turn a profit.
However, if you’re tapping your home equity to fund “wants” rather than “needs,” you’re entering risky territory. Putting your house on the line for nonessentials — especially ones that won’t pay for themselves — doesn’t usually make good financial sense.