A home equity loan lets you borrow against the value you have built up in your house

A home equity loan is a loan where your house serves as collateral. The lender looks at what your home is worth now, subtracts what you still owe on your mortgage, and lets you borrow against that difference. If your house is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity — and lenders will typically let you borrow a portion of that, often 80 to 90 percent.

The loan comes as a lump sum that you receive upfront, and you repay it over a fixed term — usually 5 to 20 years — with a fixed interest rate. Because your house backs the loan, the interest rate is typically lower than what you would pay for a credit card or personal loan. The tradeoff is real: if you cannot repay, the lender can foreclose and take your home.

Home equity loans are different from home equity lines of credit (HELOCs), which work more like a credit card — you draw money as you need it and pay interest only on what you use. This article focuses on the fixed home equity loan.

Key Takeaways

  • A home equity loan uses your house as collateral, which is why the interest rate is lower than personal loans but why foreclosure is a real risk if you default.
  • You receive the full loan amount upfront as a lump sum and repay it over a fixed schedule, usually 5 to 20 years, at a fixed interest rate.
  • Lenders typically let you borrow 80 to 90 percent of your home equity, but the exact amount depends on your credit score, income, and the lender's rules.
  • Closing costs for a home equity loan usually run 2 to 5 percent of the loan amount and include appraisal fees, title search, and origination fees.
  • Interest paid on a home equity loan may be tax-deductible if you use the money for home improvements, but not if you use it for other purposes — consult a tax professional.

How the interest rate and monthly payment work

Home equity loans carry a fixed interest rate, meaning your rate does not change over the life of the loan. Your monthly payment stays the same from month one through the final payment. This predictability makes budgeting easier than with a variable-rate loan, where your payment could rise if interest rates climb.

The interest rate you receive depends on several factors: your credit score, how much equity you are borrowing against, your debt-to-income ratio, and current market rates. Someone with a 750 credit score might receive a rate of 7 percent, while someone with a 650 score might pay 9 or 10 percent for the same loan amount. The difference compounds over time — on a $50,000 loan over 10 years, a 2 percent rate difference means paying roughly $5,000 more in interest.

You can use online calculators to estimate your monthly payment once you know the loan amount, term, and rate. A $100,000 loan at 8 percent over 10 years costs roughly $1,213 per month; over 15 years, roughly $956 per month. The longer the term, the lower the monthly payment but the more interest you pay overall.

What you need before you can borrow

Lenders require several pieces of information and documentation before they will approve a home equity loan. You will need a recent home appraisal to establish what your house is worth — this typically costs $300 to $500 and is often ordered by the lender. You will also need your current mortgage statement showing how much you still owe, proof of income (usually recent pay stubs and tax returns), and authorization for the lender to pull your credit report.

Your credit score matters significantly. Most lenders require a score of at least 620, though better rates usually start at 700 or higher. If your score is below 620, you may still find lenders willing to work with you, but the interest rate will be higher and the loan amount lower. Your debt-to-income ratio — the percentage of your monthly income that goes to debt payments — also affects approval. Most lenders want this ratio below 43 percent, though some will go higher.

You will also need to prove you have owned the home long enough to have built equity. Most lenders require you to have owned it for at least 12 months, though some require 24 months. If you recently purchased your home, you may not yet have enough equity to borrow against, or you may have to wait before explore.

Closing costs and fees you will encounter

A home equity loan involves closing costs similar to those you paid when you bought your house. These typically include an appraisal fee ($300–$500), a title search and insurance ($200–$400), an origination fee (often 1–2 percent of the loan amount), and various processing and underwriting fees. Altogether, closing costs usually total 2 to 5 percent of the loan amount.

On a $50,000 loan, that means $1,000 to $2,500 in upfront costs. Some lenders let you roll these costs into the loan itself, which means you do not pay them upfront but you pay interest on them over time. If you roll $1,500 in closing costs into a $50,000 loan at 8 percent over 10 years, you will pay roughly $175 more in interest over the life of the loan.

Ask the lender for a Loan Estimate form, which is required by federal law and shows all fees and costs upfront. This document lets you compare offers from different lenders. Some lenders advertise lower rates but charge higher fees; others do the reverse. The Loan Estimate makes the true cost visible.

When a home equity loan makes sense versus other borrowing options

A home equity loan is cheapest when you need a large sum of money and can afford the monthly payment. Because the interest rate is lower than personal loans or credit cards, borrowing $30,000 for a home renovation or to pay off high-interest debt often costs less through a home equity loan. If you are consolidating credit card debt at 18 percent interest into a home equity loan at 8 percent, you save money even after paying closing costs.

A home equity loan makes less sense if you are borrowing a small amount — say, under $10,000 — because closing costs eat into the savings. A personal loan or credit card might be cheaper for a small, short-term need. A home equity loan also makes less sense if your credit score is very low, because the rate will be high enough that the advantage over other borrowing disappears.

A HELOC (home equity line of credit) is better if you do not know exactly how much you need or plan to draw the money over time. A HELOC works like a credit card: you have a credit limit, you draw what you need, and you pay interest only on what you use. The downside is that HELOC rates are usually variable, meaning they can rise if the prime rate rises.

The tax deduction question and when it applies

Interest paid on a home equity loan may be tax-deductible, but only under specific conditions. If you use the loan money to buy, build, or substantially improve the home that secures the loan, the interest is deductible. If you use the money for anything else — paying off credit cards, funding a business, paying medical bills — the interest is not deductible.

The deduction also requires that you itemize deductions on your tax return rather than taking the standard deduction. For most people, the standard deduction is larger, so the tax benefit of a home equity loan does not actually save money. A tax professional can tell you whether itemizing makes sense for your situation.

Do not borrow more than you need based on the hope of a tax deduction. The deduction is a secondary benefit, not the reason to take the loan. If you do not need the money, do not borrow it.

What happens if you cannot repay

If you miss payments on a home equity loan, the consequences are serious. Unlike a credit card or personal loan, the lender can foreclose on your house. Most lenders will not foreclose when ready — they typically allow 120 days of missed payments before starting the process — but the risk is real and permanent.

If you are struggling with payments, contact your lender as soon as possible. Some lenders offer forbearance (temporarily lowering or pausing payments), loan modification (changing the terms), or refinancing options. The earlier you reach out, the more options you usually have. Waiting until you are several months behind leaves you with fewer choices.

If you are considering a home equity loan to cover expenses you cannot otherwise afford, pause and think about whether you can truly repay it. A lower interest rate does not matter if you end up losing your home.

Frequently Asked Questions

Can I get a home equity loan if I still owe a lot on my mortgage?

Yes, as long as you have equity. If your home is worth $400,000 and you owe $350,000 on your mortgage, you have $50,000 in equity and can borrow against it. Lenders typically let you borrow up to 80 or 90 percent of your total equity, so you could borrow roughly $40,000 to $45,000 in this scenario.

How long does it take to get approved and receive the money?

The process usually takes 2 to 6 weeks from process to closing. The appraisal takes 1 to 2 weeks, underwriting takes another 1 to 2 weeks, and closing takes a few days. You receive the lump sum at closing. Some lenders are faster; others slower. Ask the lender for a timeline when you explore.

What if my home value has dropped since I bought it?

You can still borrow against your equity if you have any. If your home is worth less than you owe on your mortgage, you have no equity and cannot take out a home equity loan. If you have some equity but less than before, you can borrow against what remains, though the loan amount will be smaller.

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

Most home equity loans have no prepayment penalty, meaning you can pay it off early without extra fees. Check your loan documents or ask the lender before you sign. Paying early saves you interest, though it does not lower your monthly payment unless you refinance.

Is a home equity loan the same as a second mortgage?

A home equity loan is a type of second mortgage — it is a loan secured by your home that sits behind your primary mortgage. If you foreclose, the primary mortgage lender gets paid first, and the home equity lender gets paid from what remains. This is why home equity loans carry slightly higher interest rates than primary mortgages.