What Is a Home Equity Loan? How It Works, Rates & How to Qualify

A home equity loan is a second mortgage that lets you borrow a lump sum against your home's equity at a fixed interest rate. You repay it in equal monthly installments over 5–30 years, using your house as collateral.

You receive the full loan amount upfront in a single disbursement. The interest rate is locked for the life of the loan, so your monthly payment never changes.

Because the loan is secured by your property, you risk foreclosure if you default. Interest is usually tax-deductible if you use the funds for home improvements, but not for other purposes—consult a tax professional.

You apply through a bank, credit union or online lender. The lender orders an appraisal to confirm your home's value, pulls your credit report and verifies your income.

Repayment starts immediately. You make fixed monthly payments of principal and interest, just like your first mortgage.

If you sell your home before the loan is paid off, you must repay the balance at closing from the sale proceeds. If you refinance your first mortgage, the home equity loan remains in second-lien position unless you roll it into the new first mortgage.

A home equity line of credit (HELOC) works like a credit card: you get a revolving credit line, draw what you need during a 5–10 year draw period, and pay interest only on the balance you use. After the draw period, you repay principal and interest over 10–20 years.

A cash-out refinance replaces your existing first mortgage with a larger new loan. You pocket the difference in cash.

Most lenders cap your combined loan-to-value ratio (CLTV) at 80–85 %. CLTV is the sum of all liens on your home divided by its appraised value.

Formula: Maximum total debt = Home value × 0.85 Maximum home equity loan = (Home value × 0.85) − First mortgage balance

Some lenders allow up to 90 % CLTV if you have excellent credit (740+) and low debt-to-income ratio. Others cap it at 80 % to reduce their risk.

You also need a minimum equity cushion. If you owe $380,000 on a $400,000 home, you only have 5 % equity ($20,000) and won't qualify for a home equity loan even though you technically have positive equity.

Your APR (annual percentage rate) includes the interest rate plus origination fees, closing costs and other charges expressed as a yearly rate. A loan advertised at 8.00 % interest might carry an 8.35 % APR once you factor in a 1 % origination fee.

Rates are higher than first-mortgage rates because the lender is in second-lien position. If you default and the home is sold in foreclosure, the first-mortgage holder is paid in full before the home equity lender sees a dollar.

Follow these steps to apply and close a home equity loan:

1. 1Calculate your available equity. Use the formula above to estimate your maximum loan amount based on your home's current value and mortgage balance.

1. 1Check your credit score and report. Pull your free report at annualcreditreport.com and dispute any errors. Aim for at least 680; 740+ unlocks the best rates.

1. 1Document your income. Gather two recent pay stubs, two years of W-2s or tax returns (if self-employed) and any other income sources like rental income or alimony.

1. 1Calculate your debt-to-income ratio (DTI). Add all monthly debt payments (mortgage, car, student loans, credit cards) and divide by your gross monthly income. Lenders prefer DTI below 43 %; below 36 % is ideal.

1. 1Shop at least three lenders. Compare APRs, origination fees, closing costs and repayment terms. Credit unions and online lenders often beat big banks on rate.

1. 1Submit a formal application. The lender pulls your credit (hard inquiry), orders an appraisal ($400–$600, sometimes waived) and verifies employment.

1. 1Review the Loan Estimate. Federal law requires lenders to provide this three-page form within three business days. It shows your interest rate, monthly payment, APR and all closing costs.

1. 1Clear any title issues. The lender runs a title search to confirm you own the property free of liens, judgments or code violations.

1. 1Sign closing documents. You'll sign a promissory note, deed of trust or mortgage, and a right-of-rescission notice (you have three days to cancel after signing).

1. 1Receive funds. After the rescission period, the lender disburses the loan via wire transfer or check. Funds typically arrive 3–5 business days after closing.

Closing costs run 2–5 % of the loan amount. On a $50,000 home equity loan, expect $1,000–$2,500 in appraisal, title insurance, recording fees, origination fees and credit-report charges.

Using the money for depreciating assets. Financing a vacation, wedding or car with a home equity loan puts your house at risk for consumption spending. Limit home equity loans to value-adding improvements, debt consolidation at lower rates or true emergencies.

Ignoring the total interest cost. A 15-year home equity loan at 8.5 % APR costs roughly 75 % of the principal in interest over the life of the loan. A $50,000 loan will cost you about $87,500 total ($50,000 principal + $37,500 interest).

Missing payments. A home equity loan is a mortgage. Thirty days late triggers a delinquency report to all three credit bureaus, dropping your score 60–100 points.

For more on managing debt strategically, see our [Money & Debt](/money-and-debt) guide.

Home improvements with measurable ROI. Kitchen remodels, bathroom additions and finished basements can return 50–80 % of cost in added home value. Use a contractor from our [Find a Pro](/find-a-pro) directory to get competitive bids.

High-interest debt consolidation. If you carry $40,000 in credit-card balances at 22 % APR, consolidating into an 8.5 % home equity loan cuts your interest expense by two-thirds. You trade unsecured debt for secured debt, so budget carefully to avoid default.

Education expenses not covered by federal loans. Home equity loan interest isn't deductible for tuition, but the rate still beats private student loans (9–14 %). Explore income-driven federal loans first.

A home equity loan rarely makes sense for discretionary spending, to cover ongoing budget shortfalls or to speculate in volatile investments. If your income is unstable or you're already stretched thin, the foreclosure risk outweighs the benefit.

What is a home equity loan used for?

A home equity loan can be used for any legal purpose: home improvements, debt consolidation, medical bills, education or emergency expenses. Interest is only tax-deductible if you use the funds to buy, build or substantially improve the home securing the loan.

How long does it take to get a home equity loan?

Most home equity loans close in 30–45 days from application to funding. The appraisal, title search and underwriting each take 7–14 days.

Can I get a home equity loan with bad credit?

What happens if I sell my house with a home equity loan?

You must repay the home equity loan in full at closing from the sale proceeds. The title company pays off your first mortgage, then your home equity loan, then disburses any remaining equity to you.

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

Yes. A home equity loan is a type of second mortgage—a loan secured by your home that sits behind your first mortgage in lien priority.

For step-by-step guidance on improving your financial foundation before taking on new debt, visit our [Career & Income](/career-and-income) and [Start a Business](/start-a-business) resources. You'll find actionable strategies to increase earnings, reduce expenses and build the equity cushion that makes home equity loans safer and more affordable.