A home equity loan lets you borrow against the value you have built up in your house
A home equity loan is a fixed-rate loan that uses your house as collateral. You borrow a lump sum based on how much your home is worth minus what you still owe on your mortgage. The lender records a second mortgage on your property — meaning if you stop paying, they can foreclose just like your primary lender can. You repay the loan over a set term, usually five to fifteen years, with a fixed monthly payment.
The reason lenders offer these loans is straightforward: your house is collateral they can seize. That security lets them charge lower interest rates than unsecured loans like credit cards or personal loans. The tradeoff is that you are putting your home at risk if you cannot make the payments.
Home equity loans are different from home equity lines of credit (HELOCs), which work more like credit cards — you draw money as you need it and pay interest only on what you borrow. This article focuses on fixed-rate home equity loans, the more common product for people who need a specific amount upfront.
Key Takeaways
- You need at least 15 to 20 percent equity in your home before most lenders will consider you, and the amount you can borrow depends on your home's current value and what you still owe.
- Lenders will pull your credit report, verify your income, and order an appraisal to confirm your home's value — the entire process typically takes two to four weeks.
- Interest rates on home equity loans are usually 1 to 3 percentage points higher than your primary mortgage rate, and the rate is fixed for the life of the loan.
- You will pay closing costs similar to a mortgage refinance, typically 2 to 5 percent of the loan amount, though some lenders waive them for larger loans.
- If you default on a home equity loan, the lender can foreclose on your house, so you should only borrow what you can reliably repay.
How much equity you need and how much you can borrow
Lenders want to see that you have built up real ownership stake in your home. Most require you to have at least 15 to 20 percent equity before they will lend to you. Some will go lower — down to 10 percent — but the rates will be higher and the approval process more difficult.
To find your equity, take your home's current market value and subtract what you still owe on your mortgage. If your house is worth $300,000 and you owe $240,000, you have $60,000 in equity — or 20 percent. Most lenders will let you borrow up to 80 or 85 percent of your total home value, minus what you owe. In this example, you could borrow roughly $15,000 to $21,000, depending on the lender's rules and your creditworthiness.
The lender will order a professional appraisal to confirm your home's value. This costs $300 to $500 and is usually paid upfront or rolled into closing costs. If the appraisal comes in lower than you expected, your borrowing limit drops.
What lenders check before they approve you
Home equity lenders follow a standard approval process. They will pull your credit report and score, verify your income through recent tax returns and pay stubs, and confirm you have no recent late payments or collections. They also run a title search to make sure there are no liens or legal claims against your property.
Your debt-to-income ratio matters. Lenders typically want to see that your total monthly debt payments — mortgage, car loans, credit cards, and the new home equity loan — do not exceed 43 to 50 percent of your gross monthly income. If you earn $5,000 a month and already have $1,500 in debt payments, adding a $400 home equity payment would put you at 38 percent, which is acceptable. Adding a $1,000 payment would likely be rejected.
Employment history and income stability are also reviewed. Lenders want to see at least two years at your current job, though they may make exceptions if you changed jobs within the same field. Self-employed borrowers need to provide two years of tax returns and may face stricter scrutiny.
Interest rates and how they compare to other borrowing options
Home equity loan rates are typically 1 to 3 percentage points higher than the rate on your primary mortgage, depending on market conditions and your credit score. If your mortgage is at 3.5 percent, a home equity loan might be 5.5 to 6.5 percent. Rates are fixed, meaning your payment stays the same for the entire loan term.
This is still usually cheaper than credit cards, which average 18 to 22 percent, or personal loans, which run 8 to 15 percent. The tradeoff is that a home equity loan puts your house at risk, while a credit card or personal loan does not.
Your rate depends on your credit score, the amount you borrow, how much equity you have, and current market rates. Borrowers with scores above 740 typically get the best rates. Those below 620 may be denied outright or offered rates 2 to 4 percentage points higher.
Closing costs and what happens at the end of the approval process
Home equity loans have closing costs similar to a mortgage refinance. You will typically pay 2 to 5 percent of the loan amount in fees, which cover the appraisal, title search, underwriting, and recording the second mortgage with your county. On a $50,000 loan, closing costs might run $1,000 to $2,500.
Some lenders offer "no closing cost" loans, but the cost does not disappear — it is rolled into your interest rate, meaning you pay slightly more each month over the life of the loan. For a short-term loan, paying upfront is usually cheaper. For a longer loan, rolling costs in may make sense.
At closing, you will sign the promissory note (your promise to repay), the mortgage document (which gives the lender the right to foreclose), and various disclosures required by federal law. The lender will fund the loan, usually by wire transfer or check, within one to three business days. You then have a three-day right of rescission — a federal requirement that lets you cancel the loan without penalty if you change your mind.
Why lenders require a second mortgage and what that means for your house
When you take out a home equity loan, the lender records a second mortgage against your property. This is a legal claim that says if you do not pay, they can foreclose and sell your house to recover their money. The first mortgage (your primary lender) gets paid first from the sale proceeds. The second mortgage holder gets whatever is left.
This is why second mortgages carry higher interest rates than first mortgages — the lender is taking on more risk. If your house sells for less than you owe on both loans, the second lender loses money.
The second mortgage stays on your property until the loan is fully paid off. If you sell your house, you must pay off the home equity loan from the sale proceeds before you receive any money. If you refinance your primary mortgage, you will need to either pay off the home equity loan or get the second lender's permission to stay in place.
The timeline from process to funding
The entire process typically takes two to four weeks. Here is what happens at each stage: You submit an process and initial documents (pay stubs, tax returns, proof of homeowners insurance). The lender orders an appraisal, which takes five to seven business days. While the appraisal is underway, the underwriter reviews your credit, income, and employment history and requests any additional documents.
Once the appraisal comes back and all documents are verified, the loan moves to final approval. The lender schedules a closing appointment, usually at a title company or the lender's office. You sign documents, and the lender funds the loan within one to three business days.
Delays happen when appraisals come in lower than expected, when employment or income cannot be verified quickly, or when title issues appear. Having all documents ready upfront — recent pay stubs, two years of tax returns, and proof of homeowners insurance — speeds the process.
Frequently Asked Questions
Can I get a home equity loan if I have bad credit?
Most lenders require a credit score of at least 620, though 640 to 660 is more typical for approval. If your score is below 620, you will likely be denied or offered a rate 2 to 4 percentage points higher. Some credit unions and portfolio lenders (banks that keep loans on their own books rather than selling them) have more flexible standards, but you will pay for that flexibility in higher rates.
What if my home has not appreciated much since I bought it?
If your home's value has stayed flat or declined, you may not have enough equity to borrow. An appraisal will tell you the current value. If you have less than 15 percent equity, most lenders will decline you. Waiting for the market to recover or paying down your mortgage faster are your main options.
Can I use a home equity loan for anything, or are there restrictions?
Legally, you can use the money for anything — home improvements, debt consolidation, education, medical bills, or a vacation. Lenders do not typically restrict how you spend the money. However, using it for home improvements increases your home's value and may help you justify the loan to yourself, since you are building equity.
What happens if I cannot make a payment?
Missing a payment on a home equity loan is serious because the lender can foreclose on your house. After one missed payment, the lender will contact you. After 120 days of missed payments, foreclosure proceedings typically begin. If you are struggling, contact your lender when ready — many offer forbearance or loan modification options that are better than defaulting.
Can I pay off a home equity loan early without penalty?
Most home equity loans have no prepayment penalty, meaning you can pay off the balance early without extra fees. Check your loan documents to confirm. Paying early saves you interest, though it does not reduce your monthly payment unless you refinance or modify the loan.