Your home’s equity can help build long-term wealth – and it can also provide cash when you need it. A home equity loan allows you to borrow against the equity you’ve accumulated and access money for a major expense, such as home improvement, tuition costs or debt consolidation. This type of loan can be a strategic way to put your equity to work without giving up or altering your existing mortgage.
To be clear, home equity loans are second mortgages that use your home as collateral. Default on the loan and your bank could foreclose, so such loans do come with risk. Wondering if it’s a good idea for you? Here we explain how home equity loans work and the pros and cons of this type of financing so you can decide whether tapping into your home’s value is a smart move.
- Home equity loans are second mortgages that let you borrow a lump sum against the equity in your home.
- Home equity loans have fixed rates and predictable monthly payments.
- A home equity loan uses your home as collateral to secure it, so if you default on payments, you could lose your home to foreclosure.
- If you use home equity loan funds to buy, build or substantially improve the home securing the loan, you may be able to deduct the interest, per IRS rules.
What Is A Home Equity Loan?
A home equity loan is a second mortgage that enables you to borrow a fixed amount against your home equity – your home’s current value minus the outstanding mortgage balance – and receive it as a lump sum. You’ll then repay it at a fixed interest rate for a set term, usually 5 to 30 years, depending on the lender.
The risk with a home equity loan is that your property becomes collateral. If you default on the loan, you could lose your home to foreclosure. Before you pursue a loan, be sure you can take on the added monthly payment.
Home equity loans are different from home equity lines of credit (HELOCs), another second-mortgage product that borrows against home equity. With a home equity loan, you borrow a lump sum once and repay it at a fixed rate with a set monthly payment. HELOCs, on the other hand, work like a credit card, providing a revolving credit line you can borrow from, pay down and borrow against again until the draw period (usually 10 years) ends. Unlike home equity loans, HELOCs carry variable rates.
Home equity loans can be used for any purpose. Homeowners typically use them to cover:
- Debt consolidation
- Home improvements
- Tuition costs
- Unexpected medical bills
- Car repairs
- Weddings
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How Much Can You Borrow With A Home Equity Loan?
How much you borrow on a home equity loan depends on your home’s value, the amount of equity you’ve accumulated and your lender’s combined loan-to-value (CLTV) ratio requirement. Most lenders allow a CLTV ratio of 80% to 85% on home equity loans, with some going as high as 90%, meaning you can borrow 80% to 90% of your equity stake. In 2025, U.S. homeowners had $1 trillion in tappable home equity – an average of $300,000 per borrower – yet they only accessed 3% of that, according to Cotality, a mortgage and housing market data provider.
Here’s how it looks in real life. Suppose your home is worth $400,000 and you still owe $250,000 on your mortgage. If a lender allows 80% to 90% CLTV, then the maximum total debt allowed on your home would be 80% to 90% of $400,000, which is $320,000 to $360,000. Subtract what you still owe ($250,000) and you’re left with a borrowing range of $70,000 to $110,000 with a home equity loan.
Home equity loans provide a lump-sum cash advance, making them ideal for borrowers who know exactly how much they need to achieve their goals. Home-improvement projects may be the best reason to borrow with a home equity loan because the interest could qualify as tax-deductible.
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Pros And Cons Of A Home Equity Loan
Home equity loans come with advantages as well as drawbacks. Here’s a quick snapshot of the pros and cons.
| Pros: | Cons: |
|---|---|
| Fixed interest rate | Strict borrowing guidelines and minimum equity requirements |
| Consistent monthly payments make budgeting easier | Depletes the equity you have in your home |
| Lower interest rates than unsecured debt (such as credit cards) | Closing costs, including origination fees and appraisal, can eat into the amount you receive |
| Interest may be tax-deductible (if being used for home improvement projects) | One lump sum amount could under-fund your needs if costs run over |
| Longer repayment terms (potentially making your monthly payment lower) | Your home is collateral – if you default, the lender could foreclose |
| Lump sum of cash to do with what you wish | You’ll have another monthly payment to consider |
| Generous loan amounts may be available (depending on equity) | If property value declines, you could owe more than your home’s worth |
Pros Of A Home Equity Loan
Fixed Interest Rate
For many borrowers, this is the main draw of a home equity loan. You lock in your interest rate and it never changes, so you know exactly what your payments will be for the life of the loan. The same can’t be said of HELOCs, which typically come with variable rates that fluctuate with market conditions, potentially pushing your payments up beyond what you can afford.
Stable Monthly Payment
With fixed rates, your payments will remain the same throughout your loan term. This makes it easier for you to budget for future expenses. HELOCs don’t offer that assurance unless you get a fixed-rate HELOC. Credit card APRs are variable – and usually much higher.
Lower Rates Than Unsecured Debt
The average credit card annual percentage rate (APR), which accounts for interest and borrowing costs, is currently north of 21%, while personal loans have a national average of about 12% APR as of May 2026. But average home equity loans have a lower APR, averaging around 7% or 8%.
This could save you a significant amount of money in interest over time. It also allows for a single loan rather than spreading balances out across multiple unsecured loans or higher-rate credit cards.
Interest May Be Tax-Deductible
If you use the home equity loan to buy, build or substantially improve your home, you may be able to deduct the interest on your tax bill. The IRS allows homeowners to deduct interest on the first $750,000 of mortgage debt (including the primary mortgage and any second mortgages). If you use the money for home improvements, keep receipts, invoices and other records to show the IRS and claim the mortgage-interest deduction.
Generous Loan Amounts Available
Many lenders offer home equity loans that start at $25,000 and go up to $100,000. Personal loans max out at around $50,000 (with higher interest rates), though limits vary by lender.
Cons Of A Home Equity Loan
Stricter Borrowing Guidelines
Home equity loans tend to have stringent borrowing requirements. You’ll generally need at least 20% equity in your home, a debt-to-income (DTI) ratio below 43% and a credit score of 620 or higher, though each lender has different rules. Your lender may also order a home appraisal to determine your home’s current market value.
Depletes Your Equity
Taking out a second lien on your home means you lose a big chunk of your equity. This may not be a concern right away, but if home values in your area fall, you could be underwater on both mortgages, which would limit your options if you need to sell or refinance. Even if home values do hold, when you sell, you’ll walk away with less profit.
Closing Costs
Home equity loans often come with closing costs of 2% to 5% of the loan amount. On a $75,000 loan, that’s $1,500 to $3,750 out of pocket before you see a dollar of your lump sum. Some lenders may offer to waive or reduce these fees, but read the fine print – they often cover the fees upfront in exchange for a higher interest rate.
A Lump Sum Could Underfund Your Needs
With a home equity loan, you get your lump-sum disbursement – and that’s it. If you’re not sure exactly how much you need, or you have a home improvement project with varying costs spread over time, you might underfund your needs. For projects with variable or unknown budgets, a HELOC may be a better fit since it offers greater flexibility.
Puts Your Home At Risk
Your home serves as collateral for a home equity loan. That means if you stop making payments, you could lose your home to foreclosure. Make sure to borrow only the amount you need and avoid over-leveraging your home’s equity.
Additional Monthly Payment To Make
A home equity loan is a second mortgage, so you will have another payment to budget for every month.
Is A Home Equity Loan A Good Idea?
A home equity loan makes sense when you have a specific, defined purpose for the money. Having a stable income, low debt levels, enough tappable equity and a strong credit score can help you secure better interest rates and terms. Consider a home equity loan for:
- Home improvements that add value – especially if you want to deduct interest on your taxes
- Consolidating high-interest loans and credit cards that carry high interest rates
- Large, one-time expenses with a known price tag, such as a business investment, college tuition or medical bills
- Homeowners who locked in a low primary mortgage rate and don’t want to refinance
If you plan to use a home equity loan for discretionary spending, have unstable income or are managing debt payments, borrowing against your home could add unnecessary risk.
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Bottom Line: Your Home’s Value Is A Powerful Tool
No matter the purpose, a home equity loan can be a savvy way to put your hard-earned equity to work for you. Used wisely, a home equity loan can meaningfully improve your financial picture. But whether it’s right for you depends on how you use it and whether your finances can absorb another monthly mortgage payment. Use a home equity calculator to see how much you can borrow today.
Deborah Kearns
Deborah Kearns is an award-winning independent journalist with more than 15 years of experience covering real estate, mortgages and personal finance. Her work has appeared in the Wall Street Journal, Kiplinger, U.S. News & World Report, Quartz, CNN, Forbes, Fortune, Newsweek, The Associated Press and dozens of other outlets. She previously led content and communications at a Top 15 national mortgage company and held writing and editing roles at Bankrate, NerdWallet, LendingTree and RE/MAX. She holds a bachelor's degree in journalism from the University of Florida and a master's degree in public relations from Ball State University.
