Building equity in your home doesn’t just lower your mortgage principal – it can also give you a way to access cash when you need it via a home equity loan. This type of financing allows you to convert a portion of your home equity into a lump-sum cash payment that can be used for home renovations, debt consolidation or other major expenses.
Before applying for a home equity loan, it’s essential to understand how it differs from other types of financing, the requirements, the application process and the associated risks.
Key Takeaways:
- Home equity loans are secured loans, with your home as the collateral. This means that if you default on your loan, you risk losing your home.
- Many lenders allow borrowing up to 80% – 85% of your home’s value when combined with your existing mortgage (combined loan-to-value ratio [LTV]).
- Requirements for a home equity loan generally include a healthy debt-to-income ratio (DTI), creditworthiness, a first mortgage without defaults and a home with sufficient equity.
What Is A Home Equity Loan?
A home equity loan is a type of secured loan that allows you to borrow a percentage of your equity and convert it into a one-time lump sum of cash. When you take one out, your lender uses your home as collateral – so it comes with the risk that if you can’t repay the loan, you could lose your house and all of your equity in it. A home equity loan is most often considered a second mortgage on your home (though if you own your home outright, it’s a first mortgage).
If you have enough equity, you may qualify for a home equity loan. You can apply for one from online mortgage lenders, banks and credit unions. Just keep in mind that if you take out one of these loans, you’ll be reducing the equity you have in your house.
Typically home equity loans can be used for anything without restrictions – renovations, debt consolidation, college tuition, you name it. They come with lower interest rates than unsecured debt like credit cards, and since their rates are generally fixed, you can pay down the debt via consistent monthly payments over the loan’s term.
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The Home Equity Calculation
Homeowners build equity with each mortgage payment by paying down some of the loan principal. The less you owe on your mortgage, the greater the percentage of equity you have. Home renovations (such as adding square footage) and market appreciation can also increase home equity.
To calculate your own home equity, simply subtract the balances of all loans secured by the property from its market value.
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How Does A Home Equity Loan Work?
Typically, lenders will allow you to borrow 80% – 85% of your home’s value, not the entire amount. For example, if you have a home worth $250,000 and you have $150,000 left on your mortgage, you have $100,000 in equity but a current LTV of 60%. If your lender allows you to borrow 80% of your home’s estimated value, your loan total, between the current outstanding primary mortgage and the home equity loan, could equal $200,000. So a lender may approve you for a home equity loan of $50,000.
Once your home equity loan is approved, you’ll need to close on the loan and pay closing costs. These typically run from 3% – 6% of the total loan amount. After closing, the loan will be disbursed in a single lump-sum payment, usually within 3 business days if there are no extenuating circumstances.
Home equity loans usually come with fixed interest rates. This means that as a borrower, you can plan on predictable monthly payments for the length of your loan term (common terms range from 5 – 30 years). How much you owe for each payment will depend on the interest rate, the amount you borrow and the loan’s specific repayment terms.
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Home Equity Loan Requirements
To be approved for a home equity loan, you’ll need to meet your lender’s requirements. So before selecting a lender to apply with, consider its requirements to confirm your application has a good chance of approval.
Lenders typically review:
- Debt-to-income ratio: This figure compares the amount of debt you currently owe to your total monthly income. Generally, lenders prefer to work with borrowers who have a DTI of no more than 45%; ideally, it should be 43% or less. This is because a higher ratio may indicate that you can’t fit another payment into your budget.
- Credit score: A high credit score may help you tap into a higher loan amount, a lower interest rate or both. Ideally, you should have a credit score of at least 680.
- Home equity: Given that most lenders won’t allow homeowners to tap out all their equity – and in fact may require them to leave 10% – 20% of it untouched – a significant amount of equity is generally needed to qualify for this type of loan. It’s worth confirming you have a loan-to-value ratio (the amount you owe on your loan compared to the overall value of your home) low enough to fit the lender’s requirements.
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The Home Equity Loan Process
There are a few steps involved in getting approval for a home equity loan. Here’s a breakdown of what you can expect on the journey – from calculating your equity to closing on the loan.
Evaluate Your Home Equity
Before you meet with a lender and begin a formal appraisal process, assess how much equity you have in your home, which will help determine how much you could borrow. An online home equity calculator can help. You can then use an to connect with potential lenders, who can advise on how much you may be qualified to apply for.
Get A Home Appraisal
Typically, during the loan application process, you’ll need a professional home appraisal, which will determine the value of your home – and thus the amount of equity you have in it.
Check Your Credit Score And Credit History
Research your credit score through your credit card company or bank, via a personal finance platform or by reaching out to one of the three major credit bureaus (Equifax, Experian and TransUnion). Review your credit report as well; you can check it for free at AnnualCreditReport.com, which currently allows weekly access.
Correct any mistakes you find in your report before you apply for a loan. And if your credit isn’t strong (generally below 680), you might consider improving your credit before applying.
Calculate Your Debt-To-Income Ratio
Before applying for a home equity loan, you’ll also want to be sure your DTI allows you to qualify. Most lenders prefer a DTI of 43% or lower, though requirements can vary.
Below is a simple equation to help you calculate your DTI:
DTI = (Total Monthly Debt ÷ Gross Monthly Income) × 100
For example, if you pay $1,675 a month toward debts and earn $5,200 monthly before taxes, your DTI is approximately 32%, a number that will typically qualify you for a home equity loan.
Compare Lenders
As with all major financing decisions, you should shop around before choosing a lender. Banks, online mortgage lenders and credit unions usually offer home equity loans; look for competitive interest rates and reputable, customized services. Not sure where to begin? If you had a positive experience with your original mortgage lender, you might consider sticking with them. You can also reach out to lenders, read reviews, compare lenders online and ask family, friends and colleagues for recommendations.
Apply For A Home Equity Loan
The initial application will typically include a range of questions about your finances, your employment status and your home value and equity. (Don’t worry if your lender asks for more information than anticipated during the underwriting process – this is fairly common.) Since a home equity loan generally functions as a second mortgage, you may be asked for many of the same documents you provided when you took out your first one.
Documentation needs may be different for self-employed individuals. However, here’s a rundown of the main types of documents lenders request during the home equity loan underwriting process:
- Most recent mortgage statement
- Recent pay stubs
- W-2 forms for the last 2 years
- Tax returns for the last 2 years
- Documentation of any extra income sources
- Recent bank statements
- Identity documentation, such as a driver’s license
- Social Security number
- Recent home appraisal
Average Home Equity Loan Interest Rates
Home equity loan interest rates tend to be lower than those associated with unsecured loans, such as credit cards and personal loans. However, they are usually slightly higher than primary mortgage rates; they will vary by lender, and they change quickly with Treasury yields.
As an example, as of December 2025, the national averages according to the National Credit Union Administration were:
- 6.63% for 5-year home equity loans at credit unions (vs. 6.26% for a 30-year fixed rate mortgage)
- 7.31% for 5-year home equity loans at banks (vs. 6.5% for a 30-year fixed rate mortgage)
Alternatives To A Home Equity Loan
If you’re not interested in a home equity loan or can’t qualify for one, there are other avenues to consider:
Personal Loan
If you want to preserve your home’s equity, a personal loan can be a good option. This type of loan doesn’t affect home equity, and because it’s unsecured, it also doesn’t carry the risk of losing your home (or any other collateral) if you default.
However, there are downsides: Fixed-rate personal loans may have higher interest rates than home equity loans, and they often come with stricter lending requirements as well.
Cash-Out Refinance
A cash-out refinance involves replacing your existing mortgage with one that has a higher loan balance. After you pay off the initial mortgage, you receive the extra funds as a lump sum. This route allows you to use your equity but still contend with only one mortgage payment. The drawback is that a cash-out refinance usually means a higher monthly mortgage bill.
Here’s an example of how it works: If you owe $150,000 on your mortgage and you refinance your mortgage loan into a new one with a balance of $180,000, you’d receive the difference – $30,000 – as a single cash payment (less any closing costs). But because your loan principal would now be higher, your new mortgage would likely have higher monthly payments.
Because a cash-out refinance is still your primary mortgage, it typically comes with a lower interest rate than home equity loans and home equity lines of credit (HELOCs), which are often tied to a secondary mortgage and therefore considered riskier by lenders. (This is because in the case of a default, the primary mortgage holder gets priority for any possible reimbursement over the secondary one.)
Home Equity Line Of Credit
A HELOC also gives homeowners access to their home equity. During the draw period, many HELOCs require interest-only payments, with full principal repayment beginning later.
A HELOC works a lot like a credit card, but it’s tied to a percentage of equity in your home that you can use as revolving credit. If approved, you receive a set credit limit, and you only need to repay the amount you actually borrow.
There are two main phases to a HELOC: the draw period and the repayment period. During the draw period, you can borrow, repay and borrow again, as often as you like, and you’ll usually make interest-only payments. When the repayment period begins, you can’t make any more withdrawals, and you must begin paying back the loan principal along with the interest.
The length of each phase will depend on your loan terms. For instance, many HELOCs offer a 10-year draw period and a 20-year repayment period.
Home Equity Loan Versus HELOC
A home equity loan and a HELOC are both considered second mortgages and both use your home as collateral. The difference is in how the borrowed funds are accessed and repaid.
When you take out a home equity loan, you receive a lump-sum payment with a fixed interest rate and installment payments due each month. In contrast, a HELOC is a revolving line of credit that allows you to borrow and repay funds, much as with a credit card, for a set number of years.
Since both options are secured loans, if you’re unable to repay either one, you risk losing your home. Also, while some HELOCs offer fixed rates, many have variable interest rates, which means your monthly payment and interest costs can fluctuate over time, unlike with most home equity loans. This means that if you aren’t able to pay off or pay down your HELOC during the draw period, and then interest rates rise significantly during the repayment period, you could end up owing more than you can afford and potentially losing your home.
Choosing one of these types of loan over the other ultimately depends on your financial situation, your plans for the funds and your personal preference for how the loan is repaid and its funds are disbursed.
Pros And Cons Of A Home Equity Loan
Like any loan, a home equity loan comes with advantages and disadvantages for the borrower. Before you tap into your equity, it’s essential to carefully weigh these factors.
| Pros: | Cons: |
|---|---|
| Potential to borrow more money than a personal loan may provide | Your home is collateral for the loan; you risk foreclosure if you default. |
| Interest may be tax deductible if the loan funds are used to buy, build or substantially improve the home securing the loan, according to IRS rules. | You must have enough equity in your home to draw from. |
| A fixed repayment amount each month, in most cases | Strict requirements and criteria to qualify |
| Lower interest rates than unsecured loans | You have to pay closing costs on the loan. |
FAQ
The Bottom Line: Home Equity Loans Allow You To Use Your Equity When You Need It
A home equity loan is a secured loan that uses your home as collateral, allowing you to convert a portion of your equity into cash.
The loan is typically paid out as a lump sum if you meet the lender’s requirements, which may include sufficient home equity, good credit and a manageable DTI (often 43% or lower). Funds can generally be used for any purpose, such as home renovations, debt consolidation or education expenses.
Home equity loans usually have fixed interest rates, meaning monthly payments remain consistent throughout the loan term. However, because your home secures the loan, failing to make payments could result in foreclosure and the loss of your home.
Wondering how much you could borrow with a home equity loan? Use the Home Equity Calculator from Quicken Loans to estimate how much equity your home may hold.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
