Securing a loan, like a personal or home equity loan, can be a great way to pay off debt, cover the cost of a financial emergency, pay for home improvements and more. A personal loan is often easier to get, but the best home equity loans come with better rates and terms. A home equity loan is secured by the equity in your home, giving you the loan amount in a lump sum, which you’ll have to pay back over time, generally with a fixed interest rate. Default on your home equity loan, and you risk losing your home to foreclosure.
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What is a home equity loan?
The difference between what your home is worth and the current balance on your mortgage is called equity. When you take out a home equity loan, you get all or a portion of that equity in a lump sum. Often referred to as second mortgages, home equity loans are secured, which means you’ll usually get a better interest rate than with an unsecured loan but your home is the collateral.
Most home equity loans have terms ranging from five to 30 years. Although loan amounts vary, most lenders require the combined debt of your original mortgage and your home equity loan to be less than the current market value of your home if you were to sell it today. This is called the loan-to-value ratio (LTV). The lower the LTV, the lower your interest rate. Keep in mind that in addition to your loan payment, some lenders charge fees and closing costs or require a home appraisal just like with a first mortgage loan.
A home equity loan is much like a conventional mortgage and is secured by the equity in your home. It comes with separate fees and payments and is often called a second mortgage. You receive your loan in one lump sum at closing, then repay your loan with set rates and terms. Home equity loans are more rigid than HELOC’s but are a great benefit to anyone who needs money from the equity built up in their home for a particular purpose. Home equity loans are also better if you prefer structured repayment terms and monthly payments.
Home equity line of credit
Like a home equity loan, a home equity line of credit (HELOC) is also secured by your house or other property. The difference between the two is that with a HELOC, you draw money from your loan as you need it, much like a credit card. Plus, you only pay interest on the amount you borrow.
Home equity lines of credit also often come with better interest rates and terms than many home equity or personal loans. But unlike home equity loans with set rates and terms, HELOCs have adjustable interest rates, typically the prime rate plus a certain percentage. That means the interest rate you’re paying today may be higher tomorrow.
Rates and terms are fixed Set monthly paymentsSet repayment scheduleRepayment periods up to 30 years
Less flexibility in repayment termsInterest charged on the full loan amountYou’ll likely pay closing costs.Risk losing your home to foreclosureIf you sell your home, the loan is due in full.
Things to consider before taking a home equity loan
Under a 2018 tax law, you can only deduct the home equity interest on your taxes if the loan is used for home renovations, and the total amount of home equity debt, which also includes your mortgage, isn’t any more than $750,000.
If you can’t make your payments on your loan, you risk losing your home to foreclosure. Some lenders have paused foreclosures due to COVID, but your credit will still suffer from late payments.
In addition to your loan amount, you may be required to pay closing costs on your home equity loan. These costs can be paid upfront at the time of closing, or you can budget them into your total loan amount. Either way, these fees — which can range from 2% to 5% — will add to the overall cost of your loan.
Unlike a HELOC, where interest is only charged on the amount you borrow, with a home equity loan, you are charged interest on the full amount. Fortunately, in today’s market, interest rates are low.
Best for cost transparency – Discover, Member FDIC
If you want to know exactly how much you’re going to pay for that home equity loan, you can discover it easily with Discover.
4.3 / 5.0
SimpleScore Discover, Member FDIC 4.3
If you need $200,000 or less, Discover has home equity loans with a range of repayment terms. Discover is upfront with rates and terms and charges no closing costs or origination fees. Fixed rates start at just 4.99%, and Discover is willing to loan between 70% to 95% of your home’s value.
Repayment terms range from 10 up to 30 years, and you can borrow anywhere from $35,000 to $200,00. If you need more than $200,000, or if you live in Iowa, Maryland, and Texas, you’ll have to shop elsewhere for your loan. But just like a brick-and-mortar bank, you will be assigned a personal banker at the time of closing who will answer any questions you have.
Best for easy qualifying – Citi
You don’t need to be a world-star borrower to qualifying for the home equity Olympics with Citi — it has looser borrowing requirements than other lenders.
You may have to meet Citibank’s income requirements, but when it comes to qualifying, it’s easier with Citibank. That’s because if your credit is poor, it also looks at nontraditional sources of credit, like child support payments, utility bills and rent payments. You can get a loan between $25,000 and $300,000 with terms up to 30 years. If you’re already a customer — CitiGold and CitiPriority — you’ll likely get the best interest rates or closing cost credits.
When you qualify, you may be able to take out a home equity loan for up to 80% of your home’s value. Pus, Citi accepts a debt-to-income ratio of 43% or less.
Best for high LTV limits – TD Bank
See how high you can go with TD Bank — the best for a high loan-to-value percent — 89.9%, on your home equity loan.
TD Bank provides home equity loans in 15 states and Washington, D.C. If you live out west, your options are nil. You can apply for several loan products, from FHA and VA loans to HELOCs and conventional loans. Although TD Bank is best for a high loan-to-value percent — 89.9%, you need a minimum FICO credit score of 660 to qualify.
TD Bank offers competitive interest rates, a fixed-rate HELOC option, a rate discount for current account holders, and personalized service, either face-to-face, by phone or online. You can also reach TD Bank via Facebook Messenger with any general questions or comments. But while you can fill out the online application for your home equity loan or line of credit, you will have to meet with a lender to close your loan. Also, TD Bank has a minimum loan amount — $25,000 — which may be too high for some borrowers.
Best for larger loan amounts – U.S. Bank
U.S. Bank gives credit where credit is due. Larger amounts are available, but you’ll need to prove you can handle the payments with a stellar credit history.
Starting at 3.80%
4.3 / 5.0
SimpleScore U.S. Bank 4.3
If you’re an existing account-holder in a U.S. Bank, you may qualify for a 0.50% interest rate discount on your home equity loan. Loans vary from $15,000 up to $750,000 or $1 million in California and are the best choice for anyone who needs a larger loan amount. U.S. Bank offers flexible repayment terms and will waive closing costs if you qualify.
Not all locations allow you to prequalify online, and you may need to call or go to a local branch to apply for your loan. U.S. Bank requires good credit, a strong employment record and low monthly debt to qualify for larger amounts.
Most lenders let you borrow between 75% and 90% of the equity in your home. So, if you have $200,000 of equity in your home, and your lender lets you borrow 80%, then you can take out a home equity loan for $160,000 (before closing costs and other fees).
If you have enough equity in your home to fund a large purchase, a home improvement, or some other expense that your savings can’t cover, then a home equity loan might be a good idea. But, like with any loan, you’ll have to make monthly payments with interest. Home equity loans also come with closing costs, which must also be figured into the total loan amount.
Home equity loans have fixed rates and terms. The interest on your loan is charged on the full amount of the loan, adding to your total monthly payments. You’ll likely pay closing costs and possibly other fees, but some lenders waive these charges based on your credit. If you can’t make your monthly payments or default on your loan, you also risk losing your house to foreclosure. What’s more, when you sell your home, the loan is due in full.
Too long, didn’t read?
Home equity loans are great for funding an emergency or another large expense. If you have the built-up equity in your home, this type of loan usually comes with better rates and terms than a personal loan. But, if you default on your loan, your lender may foreclose on your home. If you decide to go for it, shop around to find the best rates and terms to meet your needs.