What is a Home Equity Loan?
A home equity loan is a type of second mortgage that is protected by the stocks of your home. It offers a fixed interest rate set amount, making it ideal for borrowers who know exactly what they need. You receive the funds in a lump sum payment and then amortize your regular monthly repayments over the loan period, typically around 30 years.
Since your home is collateral for a loan, the amount you can borrow is related to your current market value. The interest rates received on a home equity loan (as with other loans) vary based on your lender, credit score, income, and other factors.
How does a Home Equity Loan work?
When you issue a home equity loan, the lender will approve you the loan amount based on the percentage of shares you have in your home (among other factors). You will receive your loan proceeds in a lump sum payment and then repay what you borrowed in fixed monthly installments, including principal and interest, over a set period. Although the terms are different, residential stock loans can be repaid for 30 years.
The loan is secured by your home, so if you can’t pay back what you borrowed, your property could be seized. The lender has the right to grab it to collect the money. If that happens, it can cause serious damage to your credit score, making it difficult for you to qualify for a future loan.
Home Equity Loan Requirements
Different lenders have different home equity loan requirements, but in general, criteria include:
- Credit score: Over the mid-600s
- Home Equity: At least 20% of the home’s value
- Employment and income: Pay at least two years of employment history and stubs for the last 30 days
- Debt Income (DTI) Ratio: Under 43%
- Loan and Value (LTV) ratio: Under 80%
If any of these areas is lacking, the likelihood of approval is significantly reduced. And it’s generally becoming more difficult to rent. Bankrate’s latest credit denial survey revealed that nearly half (48%) of Americans who applied for loans or financial products between December 2023 and December 2024 were rejected.
Home Equity Loans in 2025
As of April 2025, the median selling price of the home reached $418,000. It’s a bit down from its previous level, but that’s still good news for the net worth of American homeowners. According to the Federal Reserve Board, U.S. households owned nearly $35 trillion in home equity in the fourth quarter of 2024.
That means many homeowners are sitting in huge stocks that can be used to access cash, including home equity loans. According to property data analyst Cotality, the average mortgage-holding homeowners won about $4,100 a year-over-year, bringing their ownership interest to about $303,000. Of that, about $203,000 is tapable (i.e. you can withdraw while leaving 20% of the stock intact).
In addition to seduction to tap: Home equity loan fees have declined, along with Helock, along with their credit cousin, reflecting a cut in the Federal Reserve benchmark interest rates last fall. Assuming the Fed makes additional cuts, bank rate forecasts for 2025 call for a home equity rate request to drop to 7.90%, a level not seen since early 2023.
Home equity loan origination rose 13% in Q4 2024, according to Transunion’s latest Mortgage Credit Industry Insights report.
How to get the best home equity loan rates
Below are some practical ways to increase your chances of home equity loan approval.
- Home equity borrowers need better than average credit. You can improve your score by reducing your debt, paying bills on time, and correcting errors in your credit report.
- A “stolen” borrower who owns more than 50% of his home is the strongest candidate. Increase your housing capital stock by adding mortgage payments and investing in renovations that will increase the value of your home. The more fair the lower the risk to the lender.
- Minimal debt also improves your chances. Repayment of outstanding balances reduces the debt-to-income ratio (DTI). Please avoid using about a third of the credits available. A low DTI indicates lenders with a good balance of income and expenditure, indicating they can handle additional monthly obligations.
- Compare the terms and prices of a home equity loan with at least three banks, credit unions, or online lenders. Each lender has a different standard, so it’s best to shop. Don’t be afraid to seek a better deal. The worst they can say is no.
Should I use a Home Equity Loan?
You can use your home equity loan funds for any purpose. Some of the best reasons to use one are:
- Upgrade your home: Whether you’re looking to remodel your kitchen, add in-law suites, or install solar shavings on your roof, a home equity loan is a sensible way to pay for enhancements. You will improve your home. This means you can enjoy living there more. And once you’re ready to sell, upgrades can make them more attractive (and more valuable) for buyers. Additionally, if you use a loan to invest in your property this way, you can qualify for several tax benefits (deductions on interest).
- High-income debt integration: If you are struggling to pay off your debts at high costs like a credit card, a home equity loan can make a huge difference in the amount of interest you are paying. However, if you are considering this route, there are two important things to note: First, you need to have a real commitment not to rebuild the balance of these credit cards. Second, the amount of debt must be quite important. Transferring your credit card balances can be a better option if you are aiming to repay under $10,000.
- Covering large medical expenses: Healthcare can be very expensive and medical problems often occur unexpectedly. If you or your family needs procedures, treatment, or long-term care that are not fully covered by insurance, a home equity loan is a good way to handle these medical expenses.
How much can I borrow from a home equity loan?
To understand how much you can borrow from a home equity loan, you first need to understand how much home equity you actually have. Your fairness is essentially a difference in how much your home is worth and how much you owe your first mortgage. For example, if your home’s current fair market value is $500,000 and you’re borrowing $250,000, you’ll have a 50% stake.
Most lenders can borrow up to 80% of your stock interest (some can be as high as 85 or 90%). However, there is another factor to consider. It can be the amount of all loans or combines the loan and value ratio (CLTV). Most home equity loan lenders cap the total amount of home debt, including the initial mortgage, to 80% of the home’s market value. So in that case you could probably borrow up to $150,000 and get your total mortgage debt to $400,000 (80% of $500,000). Bankrate’s Home Equity Calculator helps you estimate your borrowing ability accurately.
Pros and Cons of Home Equity Loan
Home Equity Loan Alternatives
Home equity loans are not the only option for borrowing shares in ownership. Some options are:
- Home Equity Credit Line (HELOC): HELOC – short for Home Equity Credit Line – is also protected by the stocks in your home and has similar requirements, but it works a little differently. With HELOC you can borrow money if necessary, beyond the usual 10-year draw period and up to a set limit. Meanwhile, you will need to pay interest only on what you borrow. This means that your payments may be smaller than a home equity loan that includes both interest and principal. Once the HELOC draw period ends, the loan and interest will be repaid beyond the repayment period, which is usually up to 20 years. Unlike home equity loans, HELOC offers a variety of interest rates. This means that monthly payments may change.
- Shared Stock Agreement: Investment companies such as Unlock and Hometap offer cooperative share agreements. This allows homeowners to access cash in exchange for a portion of the value of their future home. These arrangements vary, but all have advantages. Money is technically an investment, not a loan, so you don’t have to pay monthly. But they all have the same drawbacks. You are ultimately planning on making a big payment and it could come from your revenue when you sell your home.
- Refinance cash out: Another option to quickly convert some of your household into money is to use cash out refi. Unlike home equity loans, cash-out refi replaces your current mortgage with more mortgages. You should think carefully about your cash-out refi based on the rates attached to your current mortgage. If you can lock up your ultra-low rates during the pandemic, a cash-out refinance is almost certain to lock you into a significantly higher rate.
