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Jeff Ostrowski
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he spent more than 20 years writing about real estate, business, the economy and politics.
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Troy Segal
Troy Segal is a senior editor for Bankrate. She edits stories about mortgages and home equity, along with the finer financial points of owning and maintaining a home.
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A home equity loan is a type of second mortgage secured by the equity in your home. It offers a set amount at a fixed interest rate, so it’s best for borrowers who know exactly how much money they need. You’ll receive the funds in a lump sum, then make regular monthly repayments amortized over the term of the loan, typically as long as 30 years.
Because your home is the collateral for the loan, the amount you’ll be able to borrow is related to its current market value. The interest rate you receive on a home equity loan (as with other loans) will vary depending on your lender, credit score, income and other factors.
While home sales are down compared to the same time a year ago, prices have climbed above $400,000 – a record high, and good news for the net worth of American homeowners. According to the Board of Governors of the Federal Reserve System, U.S. households possessed more than $32 trillion in home equity in the first quarter of 2024, also a record high. That means most homeowners are sitting on a huge pile of equity they can leverage to access cash, including through a home equity loan.
In fact, according to Corelogic, the average homeowner gained about $28,000 in equity in the first quarter of 2024, making their ownership stake worth $305,000.
Tempting as such a stake may be, the urge to tap has been tempered by an increase in interest rates. Long gone are the low-low days of 4 and 5 percent rates. And, as borrowing’s gotten more expensive, the number of borrowers interested in home equity loans – along with HELOCs, their line-of-credit cousins – has dropped in the first quarter of the year. Particularly hard-hit by their interest rates’ rise above the psychologically important 10 percent mark, HELOC originations declined almost 70 percent of the metro areas tracked by ATTOM Data Solutions in Q1 2024. (HE Loans peaked at 9.13 percent, before settling down around 8.73 percent.)
Source: Bankrate national survey of lenders
As for the rest of 2024: The potential for Federal Reserve interest rate cuts could be good news for home equity loans. While the forecast doesn’t call for massive rate drops — for HELoans, anyway — any reduction in borrowing costs saves prospective borrowers some cash.
Lenders have different requirements for home equity loans, but generally, the standards include:
If you fall short in any of these areas, your chances of approval decrease significantly. Fifty percent of Americans who applied for a loan or financial product since March 2022 have been turned down, including the 3 percent who were home equity loans and HELOCs applicants, according to Bankrate’s recent Credit Denials Study.
If you have been denied a home equity loan by a lender, focus on the reasons behind the denial. Whether you have a poor credit history, a high debt-to-income ratio, unstable income or insufficient equity in your home, work on fixing the issues before you consider reapplying. — Linda Bell, Senior Writer, Bankrate
Here are some practical ways to boost your chances of getting approved for a home equity loan:
As of the end of July 2024, home equity loan rates for the benchmark $30,000 loan are averaging just below 9 percent, within a tight range of 8.50 to 9.49 percent. While high compared to their average of 6 percent in 2022, that’s significantly lower than other forms of consumer debt. Credit card rates are lingering above the 20-percent mark, and personal loans can stretch into the 25–35 percent range for borrowers with less-than-perfect credit scores.
When you take out a home equity loan, the lender approves you for a loan amount based on the percentage of equity you have in your home (among other factors). You’ll receive the loan proceeds in a lump sum, then repay what you borrowed in fixed monthly installments that include principal and interest over a set period. Although terms vary, home equity loans can be repaid over a period as long as 30 years.
Since the loan is secured by your home, the property could be foreclosed upon if you can’t repay what you borrowed: The lender has a right to seize it to recoup its money. If that happens, it can cause serious damage to your credit score, making it harder for you to qualify for future loans.
To protect yourself from the risk of foreclosure and its consequences, it’s important to only borrow what you can afford to repay comfortably. Before getting a home equity loan, make sure you understand all of the loan terms, including the interest rates, draw period and any fees and charges. — Linda Bell, Senior Writer, Bankrate
You can use the funds from a home equity loan for any purpose. Some of the best reasons to use one include:
If you’re thinking about using a home equity loan and any of these describe you, think again:
To figure out how much you might be able to borrow with a home equity loan, you first need to understand how much home equity you actually have. Your equity is the essentially difference between how much your home is worth and how much you owe on your first mortgage. For example, if your home’s current fair market value is $500,000 and you owe $250,000, you have a 50 percent equity stake.
Most lenders will let you borrow up to 80 percent of your equity stake (some let you go as high as 85 or even 90 percent). However, there’s another factor to consider: How much all your loans amount to or your combined loan-to-value ratio (CLTV). Most home equity loan lenders will cap your total amount of home-secured debt – including your first mortgage – at 80 percent of the home’s market value. So, in that case, you would likely be able to borrow up to $150,000, taking your total mortgage debt to $400,000 (80 percent of $500,000). Bankrate’s home equity calculator can help you estimate your exact borrowing power.
A HELOC – short for home equity line of credit – is also secured by the equity in your home and has similar requirements, but it operates a bit differently. With a HELOC, you can borrow money on an as-needed basis, up to a set limit, typically over a 10-year draw period. During that time, you’ll just have to make interest-only payments on what you borrow. This means that your payments may be smaller than a home equity loan, which includes both interest and principal. When the draw period on the HELOC ends, you’ll repay what you borrowed and any interest, usually over a repayment term of up to 20 years. Unlike home equity loans, HELOCs have variable interest rates, which means your monthly payments can change.
A home equity loan and a HELOC aren’t your only options for borrowing against your ownership stake. Some other alternatives include:
Taking on any form of debt, including a home equity loan, has an impact on your credit score. After you close on a home equity loan, your score might decrease temporarily. Over time, as you continue to make timely payments on the loan, you might see your score recover and even improve, as well.
It varies by lender, but most home equity loans come with repayment periods between five and 30 years. A longer loan term means you’ll get more affordable monthly payments. That said, you’ll also pay far more in interest. If you can afford the higher monthly payments, selecting a shorter term maximizes overall cost. The ideal is to find a compromise between the two: the maximum manageable payments and the shortest loan term.
Fees for home equity loans vary by lender, which makes it very important to compare offers. Some home equity lenders require you to pay an origination fee and other closing costs, typically between 2 percent and 5 percent of the loan balance. You might also pay a home appraisal fee. Once the loan proceeds are disbursed to you, late fees could apply if you remit payment after the monthly due date or grace period (if applicable).
There are no restrictions on how you purpose your home equity loan. The most common uses include debt consolidation for high-interest credit card balances or other loans; home repairs or upgrades; higher education expenses and medical debts. Some choose to use the funds to start a business, purchase an investment property or cover another major purchase.
Arrow Right Principal writer, Home Lending
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he spent more than 20 years writing about real estate, business, the economy and politics.
Arrow Right Contributor, Personal Finance
